One year until pensions are liable for Inheritance Tax. 5 steps to take now
April marks the start of the new tax year, and 2026/27 is the final year in which pensions sit outside the scope of Inheritance Tax (IHT).
From April 2027, pensions will form part of the taxable estate, which could significantly increase IHT liabilities for many families.
The government estimates that the changes will lead to 10,500 estates becoming liable for IHT for the first time, and around 38,500 will face a higher IHT bill than they would have before.
So, it’s a good idea to use this year to review your arrangements and consider how best to incorporate this change into your wider estate plan.
Read on to discover five steps you may want to take this year.
1. Review your will to ensure you maximise your nil-rate bands
Nil-rate bands cover the portion of your estate that isn’t subject to IHT, and making full use of them is one of the simplest ways to reduce potential IHT exposure.
The current allowances are:
£325,000 for the standard nil-rate band, which is available for everyone.
£175,000 for the residence nil-rate band (RNRB), which is available when you leave your main home to your direct descendants, such as children or grandchildren. However, this allowance tapers once your estate exceeds £2 million, and is lost by the time your estate is worth £2.35 million.
When maximised, the nil-rate bands allow you to pass on up to £500,000 free from IHT. Additionally, you can transfer any unused allowances to your spouse or civil partner, meaning you can collectively pass on up to £1 million free from IHT.
So, with regard to the upcoming changes to pensions and IHT, it’s a good idea to explore how they will affect your allowances and those of your partner.
You may need to update your wills to ensure you’re able to combine your nil-rate bands and that your children and grandchildren can benefit from the RNRB.
MLP can review your will free of charge to ensure it makes the most of your allowances. To find out more, get in touch via our website.
2. Explore using your pension to pay for life insurance in trust
One strategy for passing on your pension efficiently is to use it to pay for a life insurance policy held in trust.
When you take out a life insurance policy, your beneficiaries will usually receive a payout on your death. Data from Forbes shows that around 97% of policies paid out in 2024.
If you put the policy in trust, it is removed from your estate for IHT purposes, meaning the full payout will go to your beneficiaries.
So, using your pension to pay for life insurance can be a highly effective way of ensuring your pension wealth remains efficient and is passed on to your loved ones.
However, life insurance can be expensive, particularly whole-of-life policies. If you don’t maintain your payments, the cover will end and you may receive little or nothing in return.
Premiums can also rise over time depending on the type of policy, so it’s important that you’re confident it will remain affordable, especially if you’re using your pension.
A financial planner can help you assess whether this approach aligns with your circumstances and your beneficiaries’ needs. They can also advise on the most suitable type of cover and ensure that any decisions you make are compliant and correctly set up.
You can read more about putting life insurance in trust in our previous article on the topic.
3. Consider investing your pension into a Business Relief Scheme
Business Relief (BR) allows you to claim up to 100% IHT relief on certain qualifying business assets that you’ve held for at least two years before you die.
BR schemes include shares in certain companies that may pay dividends, which could support your retirement income. As such, with careful planning, it may be possible to use your pension to invest in BR schemes that generate income and can also later be efficiently passed on.
However, BR investments are typically also higher risk and it’s important to ensure your income needs are met. So, any investment in BR assets should be balanced with accessible, lower-risk assets that can provide reliable income throughout your retirement.
It’s important to speak to a financial planner to help decide if this strategy is appropriate for you.
You can read more about the rules regarding BR in our previous article on the topic.
4. Explore gifting your pension while you’re alive
One of the easiest ways to reduce potential IHT on your pension is to gift more of it during your lifetime, rather than leaving it within your estate.
This could involve making lump-sum gifts or using withdrawals to make tax-efficient investments on their behalf, such as by contributing to a child or grandchild’s pension or Junior ISA.
It’s important to note that larger gifts may still be subject to IHT if you die within seven years, though tax may be applied at a tapered rate. Moreover, you need to ensure that any gifts you make don’t compromise your own long-term financial security.
A financial planner can help you develop a gifting strategy that balances enjoying your wealth now with passing it on efficiently to future generations.
5. Speak to a financial planner
The best strategy for managing the upcoming changes to pensions and IHT will depend on your situation.
A financial planner can help you assess the potential impact on your estate, identify the most appropriate planning options, and ensure any actions you take align with your wider goals.
To speak to a financial planner, get in touch.
Email info@mlpwealth.co.uk or call us on 020 8296 1799.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.