Recent changes to IHT have attracted a lot of attention. From 6 April 2027, unused pensions and death benefits will be drawn into the Inheritance Tax (IHT) net in the UK. This means that for many of our clients, a shift in estate planning strategy and pensions drawdown strategy may be needed.
Until now, pensions have largely been outside of the IHT scope, making them a popular tool for long-term legacy planning. Historically, defined contribution (DC) pensions could be passed on to beneficiaries free of IHT, particularly if the client died before the age of 75.
However, under the new rules, most unused pension funds will be treated as part of the deceased’s estate for IHT purposes, meaning they could attract a 40% tax rate.
According to the Office for Budget Responsibility (OBR), over 10,000 additional estates will now become liable to pay IHT and around 38,500 existing estates will have their liability increased. The government’s IHT receipts already hit a record £8.2 billion in the year 2024 to 2025, and this move is expected to add significantly to future tax revenues.
What this means going forward, is that we will want to work closely with our clients to reconsider drawdown strategies, potentially reallocating assets to reduce IHT exposure where suitable, while remaining mindful of income tax implications.
Clients should also consider gifting strategies (using annual exemptions and the seven-year rule), charitable donations, and regular reviews of asset values and tax thresholds.
The implications
Before the changes were announced, where suitable, you would typically be advised to draw on non-pension assets such as cash, ISAs or other assets in retirement first. This meant that your pension assets would remain untouched and could be passed on tax-efficiently.
After April 2027, however, you could be better off drawing down pensions earlier in retirement, especially if other income sources are limited. The goal will be to tread a careful line: take just enough income to avoid unnecessarily triggering higher income tax bands, but not so little that your pension pots remain largely untouched and subject to IHT.
Annual reviews will be critical to ensure that your drawdown plans, insurance cover, and gifting strategies remain aligned with tax legislation and evolving personal circumstances.
IHT planning options
There are a range of IHT planning strategies and options that can be considered and what is appropriate and suitable will very much be down to an individual’s circumstances.
We’ll be talking to clients about gifting strategies (using annual exemptions and the seven-year rule), charitable donations, and regular reviews of asset values and tax thresholds.
Whole of life policies are another option. These insurance policies written in Trust remain one of the most effective planning tools available. They tend to appeal to those who value simplicity and certainty and people who may not have capital to invest or gift.
Essentially, they pay out on the second death in a married couple and, when written in Trust, are not counted as part of the taxable estate. One major advantage is speed: insurers typically pay out within four weeks of being notified, which can provide your beneficiaries with liquidity to meet IHT or other bills without waiting for probate.
This can be particularly valuable, given that estate settlements can now take many months due to probate delays and new reporting requirements.
However, your premiums will depend on age, health, and the sum assured. A couple aged 60 in good health would pay less than an older couple with a higher amount to cover. You can adjust the coverage to a level that offers protection against part of the IHT liability and is also affordable, thus affording flexibility.
Business Relief (BR) products, if suitable, might also be included in the conversation. These are specialist investments that allow individuals to invest in certain types of trading businesses (such as unlisted shares) and, after a two-year holding period, have the value of the investment excluded from their estate for IHT purposes.
But it is important to be aware that BR products come with higher investment risk and may not be suitable for everyone. Generally speaking, they require a high-risk appetite and so should be considered only as a part of a diversified portfolio, and not as a replacement investment vehicle for a pension. The Government is also reducing the levels of relief in this area in 2026.
A further consideration when looking at IHT planning is that the government has yet to announce how it will allocate IHT liability across pension pots, property, and other assets. This will need careful assessment once policy is defined, as it will affect the order in which assets should be dispersed.
With less than two years until the changes take effect, we need to start thinking about various scenarios now. Annual reviews will be critical to ensure that your pension plans, insurance cover, and gifting strategies remain aligned with tax legislation and evolving personal circumstances. This includes gifting out of regular surplus income for things like school fees.
Once the final details are announced, we’ll be in touch with our clients to discuss the optimal IHT strategy for their circumstances.
We will want to work closely with our clients to reconsider drawdown strategies, potentially reallocating assets to reduce IHT exposure, while remaining mindful of income tax implications.
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or Will writing.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse. Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
If this article has raised questions for you, feel free to get in touch!
Written by Sarah Arora, an Independent Financial Adviser at Flying Colours