April 2027 Inheritance Tax and Pension changes: What to know

From April 2027 Inheritance Tax and Pension changes are coming that mean unused pension funds and many death benefits will be brought into the IHT net for the first time. For years, pensions have been one of the most tax-efficient ways to pass wealth to the next generation. Any unused pension pot could be inherited free of Inheritance Tax (IHT), making pensions a popular tool not just for retirement income, but for estate planning too. That’s about to change.

Combined with restrictions to Business Relief and Agricultural Relief that came into effect in April 2026, families with significant pension wealth, trading businesses or farmland are facing a materially different tax landscape, and in some cases, a significantly higher IHT bill.

In this article, we discuss the changes coming to Inheritance Tax, who it affects, some examples of the impact of the changes and what you can do now to prepare.

We recently covered these changes in our April 2027 changes to Inheritance Tax and Pensions webinar. If you missed the webinar, you can still catch up now on demand.

What to know about the April 2027 Inheritance Tax and Pension changes

Inheritance Tax Changes: A recap

Before looking at what’s new, it’s worth reminding ourselves of the basics:

• IHT is charged at 40% when someone dies, and can also apply to certain lifetime gifts at 20%.
• Everyone has a Nil Rate Band (NRB) of £325,000, which is exempt from IHT.
• Transfers between spouses are generally exempt, both in life and on death, and an unused NRB can pass to a surviving spouse, giving married couples up to £650,000 before any IHT is due.
• On top of the NRB, individuals may also qualify for the Residence Nil Rate Band (RNRB) of £175,000, provided a qualifying property is left to children, grandchildren or other lineal descendants and the total estate doesn’t exceed £2 million (relief tapers away above this). Like the NRB, an unused RNRB can pass to a surviving spouse, taking a married couple’s potential IHT-free allowance to £1 million, worth up to £140,000 in tax savings.
• Reliefs exist for qualifying businesses and agricultural land (Business Relief and Agricultural Relief), which can allow those interests to pass free of IHT, though as we’ll see below, this relief is now capped.
• Gifting assets during your lifetime remains a valid way to reduce IHT exposure, provided you survive seven years from the date of the gift and retain no ongoing benefit from what you’ve given away.

What changed in April 2026: Business and Agricultural Relief

Until April 2026, Business and Agricultural Relief had no upper limit, meaning a qualifying trading business or farm of any size could pass to the next generation completely free of IHT.

That’s no longer the case. From April 2026:

• 100% relief is capped at £2.5 million of qualifying asset value per person.
• Above that threshold, only 50% relief is available.
• This creates an effective IHT rate of 20% on the value of a business or farm above £2.5 million, per person.
• Any IHT due on qualifying assets can still be paid in interest-free instalments over 10 years.
• To qualify for Business Relief, the business must be a genuine trading business, and there can be restrictions where a business holds significant non-trading assets or surplus cash. Agricultural Relief can extend to farmland let to another farmer.

For business owners and farming families with assets above the £2.5 million threshold, this is a significant shift from a position of potentially unlimited relief to one with a real, calculable tax cost.

April 2027 inheritance tax and pension changes:

A further change on the horizon relates to pensions. Currently, unused pension pots can generally be inherited with no IHT due at all. From April 2027, the position changes.

Key points:

• Unused pension funds and many pension death benefits will be included in the IHT calculation on death.
• This will affect anyone who dies holding unused pension benefits – which, for many people who have built up pension wealth precisely because it sat outside their estate, could be a significant number.
• Spousal exemption may still apply, meaning the practical impact will generally fall on the second death rather than the first.
• Where pension funds are drawn down after the pension holder’s death and the holder dies aged 75 or over, the beneficiary may also face income tax of up to 45% (up to 48% for Scottish-resident beneficiaries) on top of the 40% IHT charge.
• Taken together, this can produce an effective combined tax rate of around 67% on inherited pension wealth, and as high as 91% in cases where the Residence Nil Rate Band is lost as a result of the pension value pushing the estate over the £2 million taper threshold.  The effective rate can be higher still in Scotland.
• Administering estates that include pension assets will also become more complex, more time-consuming, and more costly, since pension scheme administrators and personal representatives will need to work together to calculate and account for the IHT due.

Bringing the inheritance tax changes to life: three example case studies

 

Case study	Circumstances	IHT before change	IHT from 6 April 2027	Increase	Key impact
Mrs Alas	Widow with £2m of non-pension assets and an unused pension pot of £700,000	£400,000	£820,000	£420,000	The pension is subject to IHT and income tax of up to 45%. Of the £700,000 pension, only around £60,670 would ultimately reach beneficiaries.
Mrs Smith	Inherited a £10m trading business, £1m of other assets and a £1m pension	£140,000	£1.54m	£1.40m	Instalment payments may help with cashflow on the business element, but the size of the liability raises questions over how the balance will be funded.
Mr Jones	Widower with a £5m trading business, including £1m excess cash, £1m of other assets and a SIPP holding the trading premises	£540,000	£940,000	£400,000	The SIPP will be included in the IHT calculation and subjected to IHT at 40%.  Questions arise as to how the SIPP’s proportion of the liability will be funded given it’s only asset is the trading premises of the business.

With some planning (for example, having the company purchase the trading premises from the SIPP so there’s no surplus cash held in the business), the £5 million of qualifying business assets can attract full relief, bringing the IHT bill back down to £540,000: a saving of £400,000. The pension would then hold cash rather than illiquid property, giving it the liquidity to fund its share of any IHT due.

These examples show how the changes interact, and in particular how pension values, business structure, and the RNRB taper can all affect each other, sometimes in ways that aren’t obvious until the numbers are run.

What could April 2027 Inheritance Tax and Pension changes mean for you?

You’re likely to be affected by these changes if:

• You or your spouse hold significant personal or pension wealth.
• You own a trading business or farmland.
• You have a property rental business, particularly one held in a company.
• Your business premises are held within a SIPP or SSAS.
• Your business holds surplus cash.

What you can do next to prepare for the Inheritance Tax changes

The good news is that there’s still time to plan before the April 2027 Inheritance Tax and Pension changes take effect, and the case studies above show that thoughtful restructuring can make a meaningful difference to the eventual tax bill.

AAB’s Private Client advisory team can help you:

• Review your IHT position and quantify your potential exposure under the new rules.
• Restructure assets and Wills to make the most of available reliefs, and advise on wider IHT mitigation opportunities.

We can also co-ordinate tax, wealth and legal advice on your behalf, so you only need one point of contact to get the full picture.

To talk through how these changes might affect you or your family, get in touch with Steve Roberts, Tom Andrew, or a member of our Private Client team.