Pensions to Face Inheritance Tax from April 2027: Key Changes
Major changes to pensions and Inheritance Tax (IHT) are set to take effect from April 2027, affecting how inherited pensions are taxed. Currently, most pensions are not subject to IHT, but this will change as they become part of the deceased's estate.
What You Need to Know
If you inherit a pension from someone who died under age 75, you pay income tax when you withdraw money from the inherited pension. If they died after 75, you normally pay income tax. However, from April 2027, pensions will be included in the estate for IHT purposes, which also includes property, possessions, and money. This applies even if the deceased died before reaching the pension access age (currently 55, rising to 57 from April 2028).
Death in service payments—tax-free lump sums from employers to designated beneficiaries—will not be liable for IHT.
Impact on Estates
Government figures estimate that 10,500 estates will pay IHT for the first time due to these changes, and 38,500 will pay more IHT. Currently, few families pay IHT due to thresholds, and IHT only applies to transfers made within seven years before death. Gifts given within seven years are taxed on a sliding scale (taper relief) starting at 32%.
IHT is due if your estate exceeds £325,000, though this can be higher depending on who inherits. No IHT is payable on estates left to a spouse or civil partner. If you give your home to your children, the threshold can increase to £500,000 (basic £325,000 allowance plus £175,000). Unused IHT allowance can be passed between spouses, allowing couples to pass up to £1 million to descendants tax-free.
Reducing Your IHT Bill
The standard IHT rate is 40%, but it can be reduced to 36% if you leave at least 10% of the net value of your estate to charity in your will.
For more details, read the full story on Inheritance Tax rule changes and how they affect your loved ones.
