UK Inheritance Tax Changes – Families Face Higher HMRC Bills from 2027

Families across the UK are being advised to review their financial plans as upcoming changes to inheritance tax could lead to higher liabilities. Financial advisers have warned that new rules, first outlined in the Autumn Budget 2024, will expand the scope of inheritance tax and may significantly affect estates that include pension savings.

The changes are not immediate, but with implementation scheduled for April 2027, advisers say early awareness and preparation are important.

Inheritance tax in the UK is currently charged at 40 percent on the value of an estate above certain thresholds. Traditionally, pensions have been treated differently from other assets and were often excluded from inheritance tax calculations.

However, under the proposed changes, unused pension funds will be included as part of an individual’s estate. This adjustment could increase the total taxable value of estates, particularly for those who have accumulated significant pension savings.

Changes

The key reform is the inclusion of unused pension funds within inheritance tax calculations from April 2027.

Previously, pensions were commonly used as a way to pass on wealth more efficiently, as they were not counted toward the taxable estate. This made them a strategic tool in estate planning.

From 2027 onward, that advantage will be reduced or removed, depending on how the final rules are implemented.

AspectCurrent RulesFrom April 2027Pension treatmentExcluded from estateIncluded in estateTax rate40% above thresholds40% above thresholdsPlanning flexibilityHigherMore limitedImpact

The inclusion of pensions is expected to increase inheritance tax liabilities for many households. For some individuals, pensions and property represent the largest components of their wealth.

By bringing both into the same tax calculation, the total value of estates subject to tax could rise significantly.

Financial planner Alex Pugh of Saltus noted that concern among clients is widespread. According to her, many individuals are trying to understand how the changes will affect their personal circumstances and whether any adjustments are possible.

However, there are practical limitations. Many people rely on their pensions to fund retirement, which makes it difficult to restructure assets solely for tax purposes.

Thresholds

Despite the upcoming changes, existing inheritance tax allowances will remain in place. These thresholds determine how much of an estate can be passed on without incurring tax.

Allowance TypeAmountStandard nil-rate band£325,000Residence nil-rate band£175,000Combined potential (couples)Up to £1 million

Individuals can pass on up to £325,000 tax-free. An additional £175,000 allowance applies if a primary residence is left to a direct descendant.

For married couples or civil partners, unused allowances can be transferred, potentially allowing up to £1 million to be passed on without inheritance tax.

Planning

Estate planning is expected to become more complex as a result of these changes. The UK inheritance tax system already includes multiple rules related to gifting, allowances, and tapering.

Advisers suggest that individuals review their financial arrangements, but also note that not all strategies will be practical or beneficial.

Key considerations include:

Balancing retirement income needs with estate planning goalsReviewing pension usage and withdrawal strategiesKnowing how different assets are treated for tax purposesSeeking professional advice where necessary

While some may explore options to reduce tax exposure, significant changes to financial plans should be approached cautiously.

Administration

Another area of uncertainty is how the updated tax will be administered. Current indications suggest that personal representatives, such as executors, will be responsible for calculating inheritance tax liabilities.

They may also need to coordinate with pension providers to ensure the correct tax amount is paid.

However, detailed procedures are still being developed, and further clarification from the government is expected. This lack of detail has contributed to uncertainty among both advisers and taxpayers.

Complexity

One consistent concern raised by financial professionals is the complexity of the inheritance tax system. The combination of multiple allowances, rules, and exceptions can make planning difficult for individuals without specialist knowledge.

Simplification has been suggested as a potential improvement, though no specific reforms in that direction have been confirmed.

For now, individuals are encouraged to stay informed and review their financial plans periodically as more details emerge.

The upcoming inclusion of pensions in inheritance tax calculations represents a notable shift in UK tax policy. While the full impact will depend on individual circumstances, the change is likely to increase tax exposure for many estates. Early awareness and careful planning may help families navigate the transition more effectively.

FAQsWhat is changing in 2027?

Pensions will be included in inheritance tax.

What is the inheritance tax rate?

40% above the set thresholds.

How much is tax-free?

Up to £325,000 or £1 million for couples.

Will this affect all families?

Mainly those with larger estates.

Who handles the tax payment?

Estate executors manage the process.