Families Face New Inheritance Tax Burden from 2027
From 6 April 2027, unused pension savings will be brought into the scope of inheritance tax (IHT) a change the Treasury says will create consistency in the treatment of assets passed on after death. While pensions have long been considered outside the estate for IHT purposes, this policy shift means grieving families could soon be faced with larger tax bills at the most difficult time.
The government has confirmed that personal representatives, not pension scheme administrators, will be responsible for reporting and paying any tax due. Death-in-service benefits will remain exempt, and transfers to surviving spouses, civil partners and charities will still be protected under existing reliefs.
Industry experts warn the reform could almost double the number of estates paying inheritance tax, raising difficult questions for households already dealing with frozen thresholds and rising property values.
1. The Policy Change Explained
The government’s plan is straightforward: from April 2027, unused pensions and certain death benefits will be included in the value of an estate when calculating IHT.
Currently, pensions can often be passed to beneficiaries free of inheritance tax, regardless of size. Under the new system, they will be treated like other estate assets and taxed at the standard rate of up to 40% once thresholds are exceeded.
The Treasury has said the reform ensures "fairness and simplicity" across different forms of wealth.
2. What Remains Exempt
Some safeguards will remain in place:
- Death-in-service benefits from registered pension schemes will not be taxed.
- Spousal and civil partner exemptions are unaffected, allowing wealth to pass tax-free between partners.
- Transfers to charities will also remain exempt.
This means that the heaviest impact is expected to fall on single people, cohabiting couples, and families where pension wealth cannot be sheltered by spousal relief.
3. The Financial Impact
While the government has not published detailed household-level figures, analysts have attempted to model the effects:
- Quilter, a wealth management firm, suggested that a single homeowner in England with a property worth £290,000 and a £415,000 pension pot could face an inheritance tax bill of over £80,000.
- The firm also warned that families in higher-value housing markets, such as London, could see six-figure tax bills.
These are estimates, not government forecasts, but they illustrate how quickly pension wealth can push estates above the IHT threshold.
4. How Many Families Will Be Affected?
Currently, around 4–5% of estates pay inheritance tax each year. Some commentators suggest this could rise to around 10% once pensions are included, although official figures have not yet confirmed this projection.
Royal London, a pension provider, has noted that thousands of estates that would previously have fallen below the threshold could be dragged into liability.
5. Administrative Responsibility
Initially, HMRC proposed that pension scheme administrators would have to calculate and pay any inheritance tax on pensions. Following industry consultation, the responsibility has been transferred to personal representatives (PRs).
This means executors will now need to obtain valuations from pension providers and include them when calculating the total estate. Critics warn this could add complexity, delays, and potential liquidity issues, especially if tax must be paid before pension assets are accessible.
6. Expert Concerns and Wider Implications
Financial advisers have voiced concern that the reform could:
- Increase the financial burden on bereaved families without generating substantial additional revenue.
- Complicate estate administration, particularly for estates with multiple pension pots.
- Expose cohabiting households and single parents to disproportionately high tax bills.
Jon Greer, head of retirement policy at Quilter, cautioned:
“A grieving family with young children and an average-priced home could face six-figure IHT bills at the most distressing time. Married couples are protected by exemptions and allowances; cohabitees aren’t.”
Final Summary
At-a-glance: Pensions enter IHT scope from 2027.
The government’s decision to include pensions in inheritance tax calculations marks a significant change in estate planning. While exemptions for spouses and charities soften the blow for some, single households and cohabiting couples could face large and unexpected tax bills.
Experts advise families to review wills, pension nominations, and gifting strategies now, rather than waiting until the rules take effect. With inheritance tax thresholds frozen until at least 2028, more families are already finding themselves caught and the addition of pensions will only widen that net.
