Inheritance tax: The one-year countdown

Introduction

April 2027 may feel far away, but for anyone with pension savings, the clock is already ticking. A major shift in UK inheritance tax (IHT) rules is on the horizon, and it could fundamentally change how your wealth is passed on.

From April 2027, pensions will no longer sit comfortably outside the inheritance tax net. Instead, most unused pension funds and certain pension death benefits will be brought into the scope of IHT. For many families, that could mean a potential 40% tax charge on assets they had always assumed were protected.

But the biggest risk isn’t just the change itself. It’s inaction.

Tax treatment depends on your individual circumstances and may be subject to change in future.

A fundamental change to estate planning

Historically, pensions have played a central role in tax-efficient estate planning. Unused pension savings have typically fallen outside your estate, allowing wealth to pass to loved ones with little or no inheritance tax liability. That framework is now changing.

Under the new rules expected from 6 April 2027, most unused pension funds and death benefits may be included in the value of your estate for IHT purposes. If your total estate exceeds the current nil-rate band (£325,000), anything above that threshold could be taxed at 40%.

While there will still be some important exemptions (such as pensions passing to a UK-domiciled spouse or civil partner, certain dependant pensions and charitable donations), for many families, pensions will no longer offer the same shelter from inheritance tax as they once did.

This marks a significant shift in how pensions should be viewed within long-term financial planning.

Please note the Financial Conduct Authority (FCA) does not regulate inheritance tax planning and trusts.

Why this matters for families

The impact of these new rules could be substantial. In some cases, beneficiaries may face both inheritance tax and income tax on inherited pension funds. For example, if death occurs after age 75, pension withdrawals are already subject to income tax at the recipient’s marginal rate. Add inheritance tax on top, and the combined tax burden could be extremely high.

Strategies that once made sense (such as preserving pension wealth while spending other assets first) may no longer be optimal under the new framework. Put simply, pensions may no longer be the most efficient vehicle for passing on wealth to the next generation.

The real risk: Waiting too long

Estate planning isn’t something that can be done in a rush. It requires careful modelling, legal structuring and a clear understanding of how different assets interact within your estate.

As 2027 approaches, demand for specialist advice is already rising. The closer the deadline becomes, the harder it may become to implement well-structured plans in a calm and controlled way.

The most important questions aren’t technical – they're strategic:

• How exposed is your pension under the new rules?
• What would a 40% tax charge mean for your family’s future?
• Which assets should be preserved, and which should be used or transferred earlier?
• How can wealth be passed between generations without creating new tax problems?
• And crucially, can you act in time?

Remember, doing nothing is no longer a neutral decision.

How to start preparing now

While every situation is different, early planning can give you more options and more control. Practical steps may include:

• Reviewing your current estate strategy

Understand how much of your overall wealth sits in pensions and how the new rules could change your exposure to IHT.

• Reconsidering how and when you use your wealth

This may involve reviewing how you take income in retirement, passing on wealth earlier and making use of gifting allowances or surplus income where appropriate.

• Taking specialist advice

Estate planning is complex. Seeking financial advice can help you understand the full impact of the changes, restructure your assets where appropriate and build a long-term plan with both tax-efficiency and family priorities in mind.

The countdown has started

You’ve worked hard to build your wealth. Allowing a large proportion of it to be lost unnecessarily to tax is no longer an acceptable risk.

The inheritance tax countdown is already underway, and acting early can give you time, choice and flexibility. Waiting could mean decisions being forced upon you, with consequences measured in hundreds of thousands of pounds.

A Specialist Financial Adviser from Wesleyan Financial Services can guide you through these changes, helping you model different scenarios and create a strategy that protects your wealth and supports the people who matter most to you. 

Simply book an appointment today. Advice charges may apply.