Frozen thresholds and the April 2027 pension change

Two policy factors may make inheritance tax more relevant for some households in 2026 and 2027. The nil-rate band stands at £325,000 per person and the Residence Nil Rate Band stands at up to £175,000 per person; both are frozen until April 2031. Because these thresholds are not rising with property values or inflation, estates that were previously below the threshold may gradually move into scope over time. The nil-rate band applies to every individual, and a married couple or civil partners may be able to combine allowances on the second death, provided the first spouse left their estate to the surviving partner.

From 6 April 2027, most unused pension funds and death benefits are due to come into scope for Inheritance Tax, with some exclusions – for example, death-in-service benefits from registered pension schemes are not expected to be included. The eventual IHT effect will depend on the wider estate, the available nil-rate band, and any other exemptions that apply. The government has published draft legislation, though the precise rules may still be subject to change before the implementation date.

Pensions and IHT: what the April 2027 change involves

Under current rules, pension funds generally fall outside of a person’s estate for IHT. From 6 April 2027, most unused pension funds and death benefits are due to come into scope for IHT. Some exclusions apply, and the list of exclusions is subject to ongoing consultation. The IHT calculation will depend on the total value of the estate, available nil-rate bands, and any applicable reliefs rather than a fixed rate applied to the pension pot in isolation.

For those approaching retirement or already in drawdown, it may be worth reviewing how pension funds interact with the rest of the estate. Some individuals may choose to take advice on beneficiary nominations, the timing of withdrawals, or how pension wealth sits alongside other assets when modelling potential IHT exposure. The most appropriate approach will depend on individual circumstances, tax position, and long-term income needs.

Pension steps some individuals may consider

Some individuals may find it useful to estimate total pension fund values alongside property, savings, and other assets to understand approximate IHT exposure under the new rules. Where pension flexibility allows, some may consider the timing of withdrawals, although withdrawals above the 25% tax-free cash entitlement are generally subject to income tax, and any decision involves a trade-off between income tax and potential IHT. Reviewing beneficiary nominations is generally straightforward and does not carry the same tax trade-offs, making it a practical first step for those who have not reviewed nominations recently.

Gifts, allowances and trusts

Lifetime gifting and trusts may reduce the taxable value of an estate, depending on the rules that apply. The annual gift exemption allows each individual to give away £3,000 per tax year free of IHT, and any unused allowance from the previous year may be carried forward once. Small gifts of up to £250 per recipient per tax year are also exempt, provided the recipient has not received the full £3,000 annual exemption. Gifts made from surplus income – that is, regular gifts that do not affect the giver’s standard of living – may also be exempt, but the conditions must be met and records should be kept.

Gifts made outright more than seven years before death are generally exempt from IHT under the potentially exempt transfer rules. Gifts made within seven years of death may attract IHT on a sliding scale known as taper relief, depending on the value and timing. Trusts can form part of an estate plan in certain circumstances, but their appropriateness, tax treatment, and legal structure depend on individual circumstances, and specialist legal and tax advice would normally be required before establishing one.

Business assets, agricultural property, and available reliefs

Business Property Relief and Agricultural Property Relief are two reliefs that may be relevant for some estates. From April 2026, the government increased the combined APR and BPR threshold from £1 million to £2.5 million. Assets qualifying for 100% relief up to that combined threshold would not be subject to IHT at that level; amounts above the threshold would attract 50% relief. Qualification for relief depends on the nature of the business, the type of asset, and how the asset has been held and used, among other factors. The rules are detailed and the position should be confirmed with a specialist.

For business owners and farmers, these reliefs may make succession planning more relevant. The rules around qualifying conditions, share classes, trading status, and AIM-listed shares each have distinct requirements. Where assets may qualify for relief, a professional valuation may be required to support a claim.

Understanding your position and next steps

Some individuals find it useful to start by estimating the total value of their estate, including property, savings, investments, and business interests. From April 2027, pension funds will also be relevant to include in that estimate. Comparing the total to the available nil-rate band and residence nil-rate band gives an indication of whether an IHT liability may arise, though the precise position will depend on a range of factors including the assets held, how they are owned, any exemptions that apply, and the rules in force at the time of death.

Where an estate may be subject to IHT, some individuals may find it helpful to review available exemptions, consider whether gifting arrangements are appropriate for their circumstances, and explore whether business or agricultural reliefs are relevant. Legal and financial advice is generally appropriate before making significant decisions, particularly those involving trusts, pension withdrawals, or business restructuring.