Starting April 2027, Chancellor Rachel Reeves is introducing new Inheritance Tax (IHT) rules that will include pensions in taxable estates, potentially imposing significant financial burdens on certain UK families. The change means that private and workplace pensions will be treated similarly to cash and property when calculating IHT liability, counting towards the threshold limits.
Impact on Unmarried Partners and Blended Families
Financial experts warn that the impact will be uneven, hitting unmarried partners and blended families particularly hard due to the structure of IHT allowances. Consumer magazine Which? reports that analysis by investment platform Interactive Investor shows how key exemptions are unavailable to these groups.
For example, an unmarried partner inheriting an estate worth £600,000 from April 2027 would face a tax bill of £110,000. Under previous rules, no tax would have been due. This disparity arises because unmarried partners can only use the deceased's nil-rate band of £325,000, but not the £175,000 residence nil-rate band, which requires the home to be left to direct descendants.
Expert Commentary
Craig Rickman, personal finance expert at Interactive Investor, told Which?: 'With inheritance tax rules changing and blended families becoming more common, more grieving family members may be left with a hefty tax burden upon receiving money or assets on death. Younger people might not be aware that the amount of tax they pay on inherited assets depends on factors outside their control, including their parents' marital status. Some valuable inheritance tax-free allowances and exemptions don’t extend to unmarried couples.'
Freeze on Allowances Expands Tax Net
The tax-free allowances remain frozen until at least 2031, drawing more estates into the IHT net. The nil-rate band has been frozen at £325,000 since April 2009, and the residence nil-rate band has been £175,000 since April 2020. The Office for Budget Responsibility (OBR) estimates that around 67,000 families could face an IHT bill in 2029-30, up from just 27,800 estates in 2021-22.
Government Justification
HM Treasury defended the policy, stating: 'This change has been introduced to prevent pension schemes from being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for their intended purpose of funding retirement.'
