HMRC Pension Tax Changes May Affect Thousands Of Estates

Significant changes to inheritance tax rules are set to come into effect over the next two years, with HM Revenue and Customs (HMRC) planning to include pensions and related death benefits as part of chargeable estates.

These reforms, announced by Chancellor Rachel Reeves, could affect many individuals across the UK, with some liable for substantial tax bills without realising it.

Financial planners and industry experts have warned that the expansion of inheritance tax may catch more families in the net, especially as asset values climb and existing thresholds remain unchanged.

New inheritance tax measures planned

In the 2025 Autumn Budget, the Chancellor unveiled new proposals to expand inheritance tax scope. Among the most notable changes is the inclusion of most unused pension funds and death benefits into the taxable estate.

This adjustment is designed to increase the tax base and, according to the Treasury, modernise outdated loopholes where pensions could be passed on free from inheritance tax. The current inheritance tax rate stands at 40 percent for assets passed on above certain thresholds.

Under the revised framework, more estates, including those with moderate pension savings, will come into HMRC's focus when the reforms take hold.

Timeline for pension inclusion in inheritance tax

The key date for the pensions reform is April 2027. From this point, the tax treatment of unused pension funds at the time of death is set to change. Existing exemptions for business assets and agricultural property will also tighten earlier, from April 2026.

Chartered financial planner Alex Pugh commented that these changes represent a major shift in inheritance tax planning. 'Bringing pensions into the calculation from April 2027 really shifts the dial. Many people will drift into the tax net without realising it.'

Impact on individuals and families

Pensions are often the second largest asset for individuals after their property. With inheritance tax nil-rate bands frozen since 2009, property price increases and rising pension values mean that more estates exceed tax-free limits.

Alex Pugh pointed out that 'any individual or couple could now be affected, even those who never considered themselves wealthy.' Older individuals, particularly those approaching or over the age of 75, may be more vulnerable as their pension and property values accumulate.

Homeowners in areas with rapidly increasing house prices could also find themselves unexpectedly liable for inheritance tax, while unmarried couples do not benefit from the same exemptions as married partners or civil partners.

Changes to exemptions and allowances

Under current rules, individuals are allowed to pass on up to £325,000 in assets tax-free, with an additional £175,000 allowance for the main residence if it is bequeathed directly to descendants.

There is no inheritance tax on transfers between spouses or civil partners, and unused allowances can be transferred to the survivor, potentially allowing up to £1 million to be passed on tax-free. However, the property allowance only applies to the residence itself and not to other estate assets.

As Martin Lewis has noted, the separate allowances cannot be combined to offset non-property assets. For example, if an individual leaves £350,000 in assets and a property valued at £100,000, the £325,000 allowance covers most of the assets but a portion will still be taxed, and surplus property allowance cannot be transferred to cover this shortfall.

Estate planning and unexpected consequences

Financial planners warn that individuals who have made significant gifts within the past seven years, or who have not updated their pension beneficiary nominations, may also face unforeseen tax consequences.

For estates heavily invested in property, a lack of pension liquidity may complicate payment of the inheritance tax, potentially resulting in late-payment penalties. The precise impact of the reforms will vary according to individual circumstances.

For instance, a single individual with no descendants, £20,000 in savings, a property worth £290,000, and pension savings of £145,000, would currently not be liable for inheritance tax. After April 2027, projections suggest such an estate could incur a tax bill of approximately £52,000.

Additional complexities arise for those over 75, as pension lump sums may simultaneously trigger income tax liabilities alongside inheritance tax.