Inheritance Tax: Pensions Included In IHT Calculations From 2027
Departure from previous rules where pensions were excluded from calculations
In a significant shift announced by Chancellor Rachel Reeves, inherited pensions will become subject to Inheritance Tax (IHT) from April 2027. This marks a departure from previous rules where pensions were excluded from IHT calculations. Currently, pensions are usually passed on tax-free if you die under the age of 75 – or taxed at the beneficiaries’ marginal rate of Income Tax if you die over 75 – but in most cases, pensions don’t attract IHT.
This announcement is expected to impact roughly 8% of estates annually, as those who have heavily saved in pensions to lower their IHT liabilities now face new tax burdens.
Additionally, the IHT tax-free threshold remains frozen at £325,000 (your property, money and possessions) until 2030. If your assets include the family home that you’re giving away to children or grandchildren, you also receive up to a £175,000 residence nil rate band. As property and asset values rise, more estates will likely fall above this threshold, incurring IHT at the standard 40% rate.
Chancellor Reeves emphasised that these adjustments aim to make the IHT system fairer, ensuring wealthier estates contribute more to public finances. As these changes don’t come into force until April 2027 no action is required to be taken now. This will be an important planning discussion over the next couple of years and retirees may need to reassess their long-term financial plans, as defined contribution pension funds could attract up to 40% IHT.
AIM relief cut
The rate of relief available for ‘unquoted’ shares listed on smaller markets like AIM has been cut to 50%, which means a 20% rate of tax assuming all other allowances are used up. This will affect around 0.3% of estates. The AIM market is worth around £70 billion, and shares can currently be passed on free of inheritance tax if they are held for at least two years before death. There were fears that the relief could be abolished entirely so the 50% cut might be viewed by those affected as acceptable. AIM market prices lifted immediately after the news suggesting that was probably the case. This change comes into force in April 2026.
Also, starting April 2026, reductions in Agricultural Property Relief (APR)and Business Relief (BR) will be introduced. The first £1 million of such assets will remain tax-free, with a 20% IHT levied beyond that. The Government has committed to supporting these reliefs, creating a new combined £1 million lifetime allowance for APR and BR investments in unquoted companies. That means up to £1 million of qualifying assets can be left completely free from inheritance tax.
As the Chancellor has committed to only holding one fiscal event a year, investors and advisers will benefit from dramatically increased certainty.
All of these changes combined mean that IHT is a bigger issue than ever before. Sadly, it will affect some carefully constructed estate plans where they use their pension or one or a combination of these reliefs or allowances to stay under the IHT threshold.
It will be important for us to consider the issues with any clients who are affected and look at some of the options available.
If this blog has raised any questions why don't we have a quick chat?
MD & Certified Financial Planner
A brief meeting might be of interest, especially if you’re unsure just how wealth management and financial planning could help you.
It would only require the investment of an hour or so of your time, and the coffee’s not bad either.