Pensions and Inheritance Tax

Why This Guide Matters Now More Than Ever

If you’ve built a successful business, invested in property, or accumulated substantial pension savings, you’re probably thinking about how to protect and pass on that wealth.

You may have heard that pensions are “outside of your estate for Inheritance Tax.” That’s been true—until now. However, starting in 2027, the rules are changing.

That’s why this guide is here: to explain how pensions currently work with IHT, what’s changing, and what you can do now to prepare.

The Current Position: Pensions Are Typically Outside Your Estate

For years, one of the most tax-efficient ways to pass on wealth has been through pensions. Here’s why:

• If you die before age 75, your pension can be passed on completely tax-free.
• If you die after age 75, your beneficiaries only pay income tax (at their own rate), but no IHT.
• Importantly, most pensions aren’t part of your estate, so there is no 40% IHT.

This makes pensions an excellent vehicle for intergenerational wealth transfer, especially for business owners and those with estates over £1 million.

What’s Changing: The 2027 Rule Update

From 6 April 2027, the government has proposed a change:
Unused pension funds may become subject to Inheritance Tax.

The details are still being finalised, but the key points are:

• If you die with uncrystallised or drawdown funds still in your pension, those funds could be assessed for IHT, depending on how they’re passed on.
• This doesn’t mean pensions lose all tax advantages, but it reduces their role as an IHT shelter.

So, if you’ve been relying on pensions as your estate planning safety net, now’s the time to review and diversify your strategy.

Smart Strategies to Reduce Your IHT Exposure

Let’s explore your options—what still works, what’s changing, and what else you can do.

1. Use Business Relief (BR)

If you’re a business owner, Business Relief (formerly Business Property Relief) can significantly reduce the value of your estate for IHT purposes.

Here’s how it works:

• Shares in a qualifying trading business held for 2+ years can qualify for up to 100% relief from IHT.
• This applies whether you pass them on during your lifetime or via your will.

100% relief is available for:

• A sole trader’s or partner’s interest in a trading business.
• A holding of shares in an unquoted company, including shares listed on the Alternative Investment Market (AIM companies).
• Enterprise Investment Schemes (EIS).

50% relief is available for:

• A controlling holding of shares in a quoted company.
• Land, buildings, machinery or plant used wholly or mainly for the business.

Important:

From 6 April 2026, the 100% relief will be subject to a £1 million cap. 50% relief will then be available on qualifying assets above the £1 million allowance.

Quoted shares which give control of the company and assets used in the business will continue to benefit from 50% relief.

Investment businesses and buy-to-let portfolios do not qualify, but trading companies do.

2. Maximise Gifting and Use of Allowances

If you’re worried about the IHT hit, consider gradually passing on wealth during your lifetime.

• Annual exemption: You can give away up to £3,000 per year IHT-free.
• Gifts from surplus income: Regular gifts made from income (not capital) can be exempt if they don’t affect your standard of living.
• 7-year rule: Larger gifts may fall outside your estate after seven years, so start early.

Strategic gifting can significantly reduce your taxable estate while supporting your family now.

3. Reassess Pension Withdrawal Strategies

With the upcoming changes in mind, the old advice—preserve pensions, spend other assets first—might no longer be the best fit.

Instead:

• If your estate exceeds £2m, consider withdrawing more from pensions during your lifetime and using those funds for gifts, trusts, or life insurance.
• Consider tax-efficient investment wrappers that can still help with IHT, like AIM portfolios or discounted gift trusts.

This all needs to be personalised to your circumstances; what’s right for one family could be wrong for another.

4. Use Life Insurance to Offset the IHT Bill

You can’t always avoid Inheritance Tax, but you can plan for it.

A whole-of-life insurance policy written in trust can be used to:

• Provide your beneficiaries with a lump sum to cover the IHT bill,
• Keep your estate intact (especially helpful if much of it is tied up in property),
• Avoid delays caused by probate, since trust-held policies pay out directly.

It’s not about avoiding tax but about managing the impact.

5. Trusts Can Still Play a Role

Trusts aren’t as fashionable as they once were, but they still work. Especially when:

• You want to gift assets but retain some control,
• You’re concerned about a beneficiary’s age, lifestyle, or relationships,
• You want to cap the IHT exposure of growing investments.

Certain trust structures, like loan trusts or discounted gift trusts, can reduce IHT exposure while still allowing access to income or capital (with limitations).

6. Revisit Your Pension Nominations

Even with the 2027 changes, nominating your pension beneficiaries remains essential.

• It ensures funds are passed according to your wishes.
• It keeps control with your chosen people, not the pension provider or HMRC.
• It may allow for more flexible tax planning through successor drawdown.

Check and update your nominations regularly, especially after major life events like divorce, remarriage, or business exits.

What Business Owners Need to Consider Now

As a business owner, you have unique opportunities and risks:

• Your company can make large employer pension contributions, removing value from your estate and reducing corporation tax.
• You may be eligible for Business Relief on shares, but you need to plan succession carefully.
• Holding your commercial property or cash within the business has different IHT implications than holding it personally.

Early planning allows you to maximise reliefs and avoid triggering unnecessary tax.

Now Is the Time to Act

Pensions are still a powerful estate planning tool—but they’re no longer untouchable. With the 2027 rule change coming, doing nothing is the riskiest move of all.

By combining pensions, business relief, gifting, trusts, and life cover, we can build a layered IHT strategy that protects what you’ve built.

Let’s Protect Your Legacy—Together

At Glade Financial, I help clients make confident, well-informed decisions to secure their future and pass on wealth tax-efficiently.

• Let’s review your estate plan in light of the 2027 changes
• Identify where pensions, BR, gifting and trusts can work for you
• Build a flexible, tax-smart plan that supports your family’s future

Book a free consultation and let’s create clarity, control and confidence for your legacy.