It is widely accepted amongst Private Client solicitors that pensions have been a well-established estate planning tool for many decades, particularly for high-net-worth individuals and their families. Pension pots have generally fallen outside the realms of Inheritance Tax (IHT) given these are typically payable at the discretion of the pension trustees and this has proven to be invaluable from an estate planning perspective. 

Following the Autumn 2024 Budget, this is all set to change. 

The Finance Act 2026 is making key changes to the Inheritance Tax Act 1984 (and other legislative provisions) so that for deaths on or after 6 April 2027, most unused pensions funds will be included within the taxable value of an individual’s estate for IHT purposes. 

The extinction of the well-established estate-planning tool will have far-reaching implications for Private Client solicitors and their clients alike and it will be vital for all to have a firm understanding of the changes made and options available.  Below are some of the initial considerations although these are not exhaustive and obtaining holistic advice will be key.

From a practical perspective, following death the Personal Representatives (PRs) of an estate will continue to be responsible for reporting and meeting payment of the IHT liability. This will include IHT due on pension funds and co-ordination and co-operation will be required between the PRs and pension scheme administrators so values can be ascertained and IHT accounted for accordingly. PRs may for example ask pension providers to withhold sufficient funds to meet the IHT liability before any distributions are made to the pension beneficiaries and it will be key to have an effective and clear dialogue between the PRs and pension scheme administrators. 

There will be a risk of ‘double taxation’ given pension funds can be caught by IHT (should the value of the estate exceed IHT allowances available) but may also be caught by Income Tax rules depending on the way pension benefits are structured and withdrawn. 

Furthermore, the inclusion of pension funds for IHT may bring the taxable value of the estate above the £2million threshold for Residence Nil Rate Band (RNRB) purposes, either reducing RNRB available for the estate or wiping it out entirely. The result will be more IHT payable by the estate than might have otherwise been the case. 

Clearly these changes will have a strong impact on the IHT planning landscape. Planning ahead will be key and possible planning strategies might for example include: - 

  • Mixture of pension assets and non-pension assets – If you hold a mixture of assets there may be scope for making lifetime gifts now depending on your age and how this interacts with the associated 7-year rule for making lifetime gifts. 
  • Gifts out of Income – It may be sensible to revisit strategies for use of income. For example, clients may opt to draw from their pension earlier in retirement that might otherwise have been the case and then make regular gifts from surplus income to remove those funds from their estate entirely. Solicitors can assist in carefully documenting lifetime gifts so these are properly accounted for and relevant exemptions claimed on death. 
  • Whole-of-Life Insurance – You may wish to consider arranging whole-of-life insurance which could be written in trust with a view to ringfencing the policy proceeds from IHT whilst at the same time generating funds to meet the IHT liability on the estate. 
  • Pension Nomination Forms - It will be important for these to be reviewed and kept up-to-date to ensure nominations align with your Will and estate planning strategies and are also tailored to suit your personal circumstances. 

The above is by no means an exhaustive list but provides a flavour of the types of considerations to be addressed. There will now be an increasing need for collaboration between advisors such as solicitors, financial planners and accountants and holistic advice will be key. If you would like to consider further, please do get in touch with our Private Client team and we would be very pleased to help.