Pensions to Be Included in UK Inheritance Tax from April 2027: What You Need to Know
From April 2027, pensions will no longer be exempt from inheritance tax — a major shift that could leave your loved ones facing hefty tax bills unless you plan ahead. In this article, we explore how the changes work, the potential for double taxation, and practical strategies to help protect your family’s wealth.
From 6 April 2027, pensions will officially become part of your estate for inheritance tax (IHT) purposes. This change is clearly aimed at increasing tax revenues—but it also signals the government’s intention to encourage people to use their pensions to fund retirement, rather than leaving them untouched as a way to pass on wealth tax-free.
If you’re confident that your retirement income needs are covered—either alone or with a partner—and you’re looking to reduce the potential inheritance tax burden on your estate, there are still planning opportunities to consider. One such opportunity involves gifting from pension income.
The Double Tax Hit
Under the new rules, some beneficiaries may face a significant tax burden when inheriting pension funds. For example, someone inheriting a £100,000 pension pot after the original holder dies aged 75 could be hit with both inheritance tax and income tax—leading to effective tax rates as high as 67%.
Source: AJ Bell. Assumes the beneficiary is not a spouse/civil partner, and that no nil-rate band is available. Scottish taxpayers may be subject to different rates.
Can You Gift from Your Pension?
While pensions can’t be directly gifted to someone else during your lifetime, you can withdraw income from your pension and then gift that to loved ones. Under the new rules, it may make sense to start drawing on pension income earlier or more aggressively than before, particularly if you’re trying to reduce a future IHT bill.
Gifts made during your lifetime are treated by HMRC as “transfers of value”—and to be exempt from IHT, they must meet certain criteria.
The Annual Exemption
You can give away up to £3,000 each tax year without it being subject to IHT. If unused, this exemption can be carried forward one year.
Gifts from Income
Unlimited gifts are also allowed if they meet three specific conditions:
- The gift is part of your normal expenditure
- It is made from income (not capital)
- It doesn’t reduce your standard of living
What Counts as ‘Income’?
Income can include earnings, pension income, savings interest, and dividends. It does not include withdrawals of capital or lump-sum tax-free cash. For example, taking your entire 25% tax-free lump sum and gifting it wouldn’t qualify as a gift from income—it would fall under the ‘seven-year rule’ instead.
There is some ambiguity around whether regular or phased withdrawals of tax-free cash can count as income. HMRC hasn’t clearly defined this and tends to assess such situations case by case, so caution is advised.
The most straightforward option is to turn on or increase your pension income, then make gifts from this—provided it doesn’t force you to dip into capital (like ISAs or savings) to cover your own living expenses.
Could It Be Tax-Neutral?
Gifting from pension income means you’ll likely pay income tax on the withdrawals. However, if the recipient uses the money to make pension contributions of their own, they might be able to claim tax relief—potentially offsetting the tax you paid.
This means:
- Your gift (before tax) could be removed from your estate for IHT
- The recipient boosts their pension savings with added tax relief
- The family wealth stays within a tax-efficient wrapper
Don’t Forget the Seven-Year Rule
If your gifts don’t qualify for full exemption, they may still fall out of your estate if you survive seven years after making them. Gifts made within this period are called “potentially exempt transfers”.
If you die between three and seven years after the gift, “taper relief” may apply, reducing the IHT due.
Good Records Are Crucial
Although it’s your responsibility to prove that any gifts meet HMRC’s exemptions, in practice this falls to your executors after your death. To help them, keep clear records now—especially if you intend to rely on the gifts from income exemption.
Executors will need to show:
- The gifts were made from income (not capital)
- You maintained your usual standard of living
They’ll likely need to complete form IHT403, which includes a specific section for gifts made from normal income. Accessing old bank records after someone dies can be difficult, especially before probate is granted—so good record keeping is essential to avoid delays or missed exemptions.
Final Thoughts
These upcoming changes make pension planning even more important in the context of estate planning. While the inclusion of pensions in IHT from 2027 raises the stakes, it also creates opportunities for proactive individuals to protect family wealth—with careful gifting strategies and a strong paper trail.
Please note: This article is for informational purposes only and does not constitute personal advice. Tax and pension rules can change and depend on your individual circumstances.
Will is an Independent Financial Adviser with over a decade of experience helping expats make the most of their international status.