The change will happen within months
Inheritance tax will see significant changes from next year, affecting more than 10,000 households across the UK.
HMRC has confirmed the amendments will take effect at the beginning of the forthcoming tax year on April 6, 2027.
Around 10,500 estates will become liable for inheritance tax for the first time with an additional 38,500 estates already subject to inheritance tax encountering increased bills averaging £34,000.
Chancellor Rachel Reeves unveiled the legislative change to inheritance tax following its confirmation in the autumn budget in 2024 and, with less than a year left before implementation, individuals who have dedicated years accumulating savings with the aim of transferring wealth to future generations may wish to pay attention without delay.
What are the inheritance tax changes?
From April 6 2027, unspent pension savings will be included within the scope of inheritance tax for the first time, reports Birmingham Live. For money-saving tips sign up to our Money newsletter here.
They will be combined with everything else an individual possesses, such as their property, savings, and investments, when calculating how much inheritance tax is due on their estate.
Inheritance tax is levied at 40% on the value of an estate exceeding certain thresholds.
The standard threshold stands at £325,000, increasing to as much as £500,000 when a property is transferred to children or grandchildren, although this remains subject to conditions and tapering regulations depending on the estate’s size.
Anything beyond the available thresholds faces taxation at 40% and from April 2027 the pension pot forms part of that calculation.
Who will be affected by the changes?
HMRC projections indicate approximately 10,500 estates will become liable for inheritance tax for the first time as a consequence with an additional 38,500 estates already subject to inheritance tax encountering increased bills averaging £34,000.
For those affected funds that were previously anticipated to transfer to children and grandchildren largely intact could now face a substantial tax liability before reaching them.
It is also important to understand that pension savings can be liable to both inheritance tax and income tax in particular situations.
When a beneficiary accesses inherited pension funds they pay income tax on top at their standard rate, which means the combined tax liability could be substantial depending on personal circumstances and withdrawal approach.
The state pension is unaffected by any of this. It simply ceases when someone dies.
The change concerns specifically private and workplace pension savings.
Anything left to a surviving spouse or civil partner is also still exempt from inheritance tax.
Nevertheless HMRC states that those appointed to administer the affairs of someone who has died will be responsible for taking “reasonable steps” to identify the deceased person’s pension savings, calculate their value, and pay tax on them.
Irwin Mitchell solicitors cautioned that families frequently encounter “fragmented records, historic workplace schemes, and multiple providers”.
What steps can individuals take regarding the changes?
The initial step involves obtaining a comprehensive understanding of an estate’s actual value totalling pension savings together with property, investments, and other assets to determine whether the sum is likely to surpass the available thresholds.
Checking who is designated as a beneficiary on pension schemes is also worthwhile to ensure those particulars still match current intentions.
Beyond that several strategies merit consideration. Transferring money to family members during an individual’s lifetime represents one option.
Gifts given more than seven years prior to death are typically exempt from inheritance tax and even gifts given between three and seven years before death may qualify for taper relief which diminishes the tax liability on a sliding scale.
Trusts can also serve a purpose in estate planning for certain individuals though the regulations surrounding them are complicated and the tax consequences depend substantially on personal circumstances so professional guidance is worth obtaining before pursuing that avenue.
