Now that the dust has settled on Chancellor Rachel Reeves autumn statement last month, I have seen a big increase in enquiries from clients wishing to review their Wills following the announcement pensions will be subject to inheritance tax (IHT) from April 2027.

What are the IHT Allowances?

On death all your assets are valued. The total value of your assets which includes cash, investments, property, and valuable personal possessions such as cars and jewellery is known as your estate. If the total value of your estate is below £325,000 after the deduction of any liabilities such as funeral expenses, a mortgage, loans, or credit cards no IHT is payable. 

If on the other hand the value of your estate is over £325,000, IHT may be payable if the estate does not pass in full to a surviving spouse or civil partner. The value of the estate over £325,000 is charged at the rate of 40%.

By way of example Mr Hughes died having never married and had no children. His estate at the date of his death was valued at £500,000 which was left in its entirety to his two sisters. In this situation the first £325,000 will pass tax free to Mr Hughes’s sisters and the remaining £175,000 will be taxed at 40% resulting in an IHT liability of £70,000.

If you are married or in a civil partnership you can combine your individual IHT allowances doubling your allowance to £650,000.

In addition, if your estate includes a property which you lived in as your primary home before your death an additional take free relief known as the residence nil rate band of £175,00 per person applies if that property passes to direct descendants on death for example children and or grandchildren.

In the case of Mr Hughes had he been single at the time of his death but owned a property and was also survived by two natural children his IHT allowance would increase to £500,000 meaning no IHT would be payable. 

So, what has changed?

Currently the value of unused pension savings is not generally treated as part of the overall value of your estate on death. For this reason, pensions have traditionally been an IHT efficient way of passing wealth on to your loved ones tax-free. 

Over the years many of my wealthier clients have transferred funds from their savings which would ordinarily form part of their estate for IHT purposes into their pension. In doing so they have effectively reduced the value of their estate which will be subject to IHT. 

In some cases, those with significant savings may also choose to leave their pension pot untouched and draw all day to day living expenses from savings instead. This will have the effect of reducing the value of their assets within their estate on death whilst allowing their pension to grow outside of their estate tax free. 

From 6th April 2027 inherited pensions will no longer fall outside of your estate. 

It therefore comes as no surprise the Treasury predicts from 2027/2028 a significant increase in the number of estates subject to IHT.  

Whilst pensions are still a valuable tool for retirement savings they are no longer as IHT efficient. 

What does this mean for you?

If you have a large pension pot which places you in the IHT tax regime I can help you as part of your overall estate planning strategy in relation to the following areas:

• Assessing the value of your estate and your overall exposure to IHT
• A review of your existing pension and life insurance nominations/expression of wishes
• A review of your Will
• Utilising trusts to minimize your IHT
• Utilising spousal exemptions
• Advising on lifetime gift allowances

Estate planning is a complex area which is why engaging me as your solicitor in this process can help you avoid unnecessary taxes and maximise the wealth you leave for your loved ones. If you would like to discuss this further please click here