Inheritance Tax (IHT) is a tax that must be paid following the death of an individual. It is calculated based on the value of their estate, including property, savings and investments, above a tax-free threshold. IHT is usually charged at 40% of the estate’s value above the threshold. There are changes coming to the way Inheritance Tax is calculated, though, from April 2027. In this article, we’ll discuss the upcoming change and how the impact of the changes can be lessened.</p?
The current Inheritance Tax calculation
Currently, IHT is due on estates worth over £325,000. This threshold is known as the standard nil-rate band. A 40% charge is applied on any value above the nil-rate band. If the estate includes a residential property that is being passed to an individual’s children or grandchildren, an additional £175,000 nil-rate band is applied. In this instance, the tax-free threshold becomes £500,000.
The standard nil-rate band has been frozen since 2009, and the residence nil-rate band since 2021. Both are set to remain frozen until at least 2030. The UK has seen a sustained and significant rise in house prices since 2009. With the nil-rate band being frozen during this time, it effectively means more estates being subject to IHT.
At the moment, unused pensions are paid to beneficiaries without being subject to tax. For the purposes of this, unused pensions are funds in a pension scheme that have not been drawn down as income.
Upcoming changes to Inheritance Tax
In the 2024 Autumn Statement, the government announced a plan to include pensions in the calculation for Inheritance Tax. They had identified that some were not using their pension as a means of retirement income. Instead, pensions were being used as a mechanism for passing inheritance wealth to loved ones. To ensure equality when it comes to inheritance taxation, the government proposed to include pensions within an estate’s value from April 2027. A consultation period was undertaken, with the government announcing in July 2025 that the plan would go ahead, subject to a number of amendments.
Some of the amendments to the initial proposal affect the administrative aspect of IHT. An additional exclusion to the proposal that has been upheld is the transfer of pension and death benefits to spouses. Such a transfer will continue to be exempt from IHT. This means that when the first person in a marriage or civil partnership dies, their assets will not be subject to IHT. Some or all of their nil-rate band can also be transferred to their partner. In some cases, a maximum nil-rate threshold of £1,000,000 may be applicable for the surviving partner.
The government considered responses from the consultation and announced an amendment regarding death-in-service lump sum benefits. These are paid to dependents as a lump sum amount when an employee dies in employment. As this lump sum amount is seen as essential support to dependents, it will be excluded from the estate value when IHT is calculated.
How many people will be affected by the changes?
The government estimates there will be approximately 213,000 estates with inherited pension wealth in the 2027-28 financial year. Of these, an estimated 10,500 estates will have IHT liability that they would not previously have had. The government also estimate that 38,500 estates will pay more IHT than they would have before this change was brought in.
Lessening the impact of these changes
Whilst the government are stressing that only a small number of estates will be impacted, it will invariably impact some. There are a few options available to those wishing to minimise the impact of these changes.
Depending on your circumstances, some may be tempted to withdraw funds from their pension. Whilst 25% of your pension pot is available to be withdrawn tax-free (after the minimum age has been passed), further withdrawals will be subject to income tax. This tax is at your usual tax rate. For some this may be an attractive option, particularly if they are in the basic rate tax band, as this is lower than the IHT rate. However, this decision shouldn’t be taken lightly. Your pension is in place to support you financially through your retirement. By withdrawing from your pension, you may not leave yourself enough money to have the retirement you’re planning for.
You may also choose to give financial gifts to friends and loved ones. If there is at least 7 years between the gift-giving and your passing, the value of the gift will be excluded from your estate value. Gifts given within 3-7 years of your passing, and taking the estate value past the IHT threshold, will owe IHT. The gift recipient will be required to pay the tax, on a tapered scale, on the value above the threshold.
How can Willday Wealth Management help?
Inheritance tax can be a complicated process to understand. Our expert team at Willday Wealth Management can help you calculate your estate’s IHT liability upon your passing. We’ll discuss how the inclusion of pensions from 2027 will impact you, and offer guidance where needed. Call us on 0116 222 0119 or email hi@willdaywm.co.uk to start the conversation.
