Inheritance Tax (IHT) has been steadily pulling more families into scope as thresholds remain frozen and asset values rise. From 6 April 2027, the government’s reform brings most unused pension funds and pension death benefits into scope of IHT on death. Spouse/civil-partner and charity exemptions remain; death-in-service lump sums are excluded. For affluent families who’ve built significant pension wealth, this fundamentally changes how intergenerational planning should be approached.
What actually changes in 2027?
Under today’s rules, most defined contribution pensions sit outside your estate for IHT, because benefits are usually paid at scheme discretion. From 6 April 2027, the default flips: most unspent pension funds and pension death benefits will be included in the estate value for IHT.
Spouse/civil-partner transfers remain exempt. Charitable legacies remain exempt. Death-in-service lump sums are excluded.
In short: pensions stop being a near-automatic IHT shelter. The numbers will matter more than ever.
Keep the two taxes separate in your mind
- Inheritance Tax (IHT): From April 2027, your estate value for IHT will generally include your pensions (subject to the usual exemptions noted above).
- Income Tax for beneficiaries: Unchanged. If death is before 75, beneficiaries can usually withdraw pension funds free of income tax (subject to the post-LTA allowances and timing rules). If death is at/after 75, beneficiaries pay income tax at their marginal rate when they take money from the inherited pension.
- Transfers to a spouse/civil partner remain IHT-exempt. Where benefits pass to other beneficiaries (typically adult children), the new IHT rules from 2027 are relevant
This means that, from 2027, some families will face IHT on the value of the pension at death and Income Tax later when beneficiaries draw it. Planning the order you spend assets (and who inherits what) becomes critical.
Why the £2 million RNRB “taper trap” matters
The Residence Nil-Rate Band (RNRB) is £175,000 per person where a qualifying home passes to direct descendants. But it tapers away by £1 for every £2 that the estate exceeds £2,000,000 (measured before most reliefs). Once pensions are counted inside the estate (from 2027), many otherwise borderline estates will drift over that £2m line—eroding some or all of the RNRB and pushing the IHT bill higher.
A worked example (England & Wales, second death)
Estate
- Home: £750,000
- Buy-to-let: £150,000
- Cash/Premium Bonds/Savings: £500,000
- Pensions: £800,000
- Total wealth: £2.2m
Assume both standard nil-rate bands (NRB £325k each) and both RNRBs (£175k each) are available, the main residence passes to direct descendants, and there are no lifetime gifts or special reliefs.
Before 6 April 2027 (pensions outside IHT):
- Estate for IHT: £1.4m (excludes pensions)
- Allowances: NRB £650k + RNRB £350k = £1.0m
- Taxable: £1.4m − £1.0m = £400k
- IHT @ 40% = £160,000
From 6 April 2027 (pensions inside IHT):
- Estate for IHT: £1.4m + £800k = £2.2m
- RNRB taper: estate exceeds £2.0m by £200k → couple’s RNRB reduces by £100k (from £350k to £250k)
- Allowances: NRB £650k + tapered RNRB £250k = £900k
- Taxable: £2.2m − £900k = £1.3m
- IHT @ 40% = £520,000
Headline impact: +£360,000 extra IHT purely because pensions now count toward the estate and the RNRB taper bites.
(If death is after 75, beneficiaries will also pay income tax as they draw inherited pension funds—same rule as today.)
Illustration only. England & Wales assumptions; standard NRB/RNRB available; no gifts or reliefs; figures rounded; rules and thresholds may change
What to consider now (practical planning moves)
- Model the £2m threshold
If your combined wealth (including pensions from 2027) could sit just above £2m, consider strategies that keep the estate below the line to preserve RNRB: lifetime gifting (including regular gifts from surplus income), philanthropy, or restructuring asset ownership. Run the numbers; small changes can preserve six-figure allowances. - Rethink your “sequence of spend”
The old default—spend ISAs/taxables first and preserve pensions—was built on pensions being outside IHT. From 2027, drawing more from pensions during life (accepting income tax now) may, in some cases, reduce the future IHT base and avoid the RNRB taper. This is highly case-specific; cashflow modelling helps you quantify the trade-offs. - Update nominations and educate beneficiaries
Make sure scheme beneficiary nominations reflect your wishes and your heirs understand their withdrawal options (beneficiary drawdown vs lump sums). Under-75 deaths still allow income-tax-free withdrawals within current allowances and time limits; after 75, withdrawals are taxed at the heir’s marginal rate. - Wills and structure
Check that your will routes the family home to direct descendants (for RNRB) and preserves both spouses’ NRBs/RNRBs on second death. Trusts and certain will structures can inadvertently block RNRB—take advice before you change anything. - Plan for liquidity
IHT is usually due six months from the end of the month of death. If your estate is asset-heavy, think about how the bill is paid without forced sales (e.g., reserves or life cover in trust).
Final word
For many affluent families, pensions will no longer be a simple shelter from IHT after April 2027. The interaction between your estate size, the £2m RNRB taper, and beneficiaries’ income-tax positions can add hundreds of thousands to the final bill—or be managed with timely, well-modelled planning.
I’m Lee, The Pensions Guy—helping you plan smarter, live well, and pass on more of what you’ve built.
Important information
• UK tax rules and reliefs depend on individual circumstances and may change.
• Information is general education, not personal advice.
• Based on law, HMRC policy and guidance as at 22 September 2025; reforms scheduled for deaths on/after 6 April 2027.
• Illustrations are examples only; outcomes vary by age, asset mix, beneficiary tax bands and will provisions.
• Consider seeking regulated advice before making decisions.