HMRC's Pension Inheritance Tax Plan: What It Means for You

Tax Queen

Tax Expert @ Pie

3 min read

From April 2027, unused pensions in the UK will fall within the scope of inheritance tax (IHT) for the first time, on top of the income tax that can already apply when a beneficiary withdraws the money. HMRC has now set out more detail on how this will work, and the picture that's emerging is one of a two-tier system: pensions could be denied several reliefs that are freely available on other assets, such as ISAs, business property, and farmland. If you hold a pension and plan to leave it to your family, this affects how much of it actually reaches them.

What This Means for You

If you're a sole trader, freelancer, or landlord with a personal pension (a SIPP, for example), and you're using it as part of your long-term wealth or estate planning, this is worth understanding now rather than waiting until closer to 2027.

The changes don't touch your day-to-day Self-Assessment filing directly, but they do change how pension wealth is treated when you die, which matters if you're deciding where to hold savings, investments, or business assets going forward.

For anyone running their own business through self-employment, a lot of retirement wealth tends to sit inside pensions precisely because of the tax relief on the way in.

These proposed changes shift some of that advantage at the other end, when the pension is passed on, so it's worth factoring into any conversations you have with a financial adviser or accountant this year.

Higher Bills for Some Estates

Under the proposed rules, three valuable IHT reliefs won't apply to assets held inside a pension, even though they apply to the same assets held elsewhere. This is the part of the plan that's drawn the most criticism from the pensions industry, since it creates a clear disadvantage purely based on where an asset is held, not what the asset actually is.

Loss on sale relief, which lets executors reclaim IHT if an asset (such as shares) is later sold for less than its value at death, currently applies to ISA holdings but won't apply to pensions. In practice, this means an estate could end up paying IHT on a valuation that no longer reflects what the asset is actually worth by the time it's sold.

Business property relief and agricultural property relief, which can reduce the taxable value of a farm or business by up to 100% (capped at £2.5 million, with 50% relief above that), also won't apply where those assets sit inside a pension. This could push some family businesses or farms towards a much bigger tax bill purely because of how the assets were held, rather than what they are. If you're self-employed and hold business assets inside a SIPP as part of your retirement planning, this is a detail worth flagging with your adviser.

The option to pay IHT in instalments over up to ten years, normally available for illiquid assets like commercial property, won't be available either. That means an estate could be forced into a quicker sale just to cover the tax bill, which is a difficult position for any family to be in shortly after a bereavement.

The Double Taxation Risk

There's a further complication if the pension holder dies aged 75 or over. In that case, the pension could be taxed twice: once as part of the estate for IHT, and again as income when the beneficiary withdraws it.

According to AJ Bell, this combination could produce an effective tax rate of up to 64% for higher-rate taxpayers inheriting pension assets, a substantial reduction compared with inheriting the same value through most other assets.

This is arguably the detail that matters most for planning purposes. A pension that looks like an efficient way to pass on wealth today could, under the new rules, end up being one of the least efficient options available, depending on the age at which the holder dies and the tax bracket of the person inheriting it.

What Still Works

Not everything changes. Quick succession relief will still apply to pensions. This reduces the IHT bill when the same assets are taxed twice in quick succession, for example, passed from parent to child and then from child to grandchild within five years, similar in spirit to the rules around cash gifts between family members.

It's calculated on a sliding scale depending on the time between the two transfers, so the sooner the second transfer happens after the first, the more relief is available.

The rules around this relief are detailed and easy to get wrong, so it's not something to rely on without proper advice, particularly if your estate includes a mix of pension and non-pension assets.

What You Can Do Now

These rules aren't final until closer to April 2027, but if pension and estate planning is part of how you manage your business or personal finances, it's worth reviewing your position with a financial adviser ahead of the change, particularly if you hold business assets or property within a pension wrapper.

The earlier you understand how these reliefs (or the lack of them) affect your specific situation, the more options you'll have. It's also worth keeping an eye on your ongoing filing obligations, including when you need to submit a Self Assessment return, since good year-round records make these longer-term conversations easier.

While IHT planning sits outside what any self assessment software is built to handle, staying on top of your annual tax return is still the foundation of good financial planning. Knowing exactly what you've earned, what you've claimed, and what you owe each year makes it much easier to have a meaningful conversation about longer-term planning, including pensions.

At Pie Tax, our team specialises in helping sole traders, freelancers, and landlords stay on top of exactly this kind of detail.

If you're a sole trader, freelancer, or landlord, Pie Tax makes that side of things straightforward, from tracking income and expenses throughout the year to filing your return when it's due. Here's how Pie Tax works if you'd like to see it in practice. When you're ready, try Pie today or download the app to get your Self-Assessment sorted well ahead of the deadline.