From April 2027, pensions are expected to be included within your estate and could therefore be liable for Inheritance Tax (IHT). While this date may feel a long way off, the inheritance tax changes 2025 UK policy announcement is already prompting many families to review their estate plans. Acting now could help ensure your legacy is protected.
At present, pensions usually fall outside your estate when calculating IHT. That’s why they have often been used as part of tax-efficient strategies to pass on wealth to loved ones. However, the planned inclusion of pensions could mean some estates face IHT for the first time — or that existing estate plans may need to be updated.
For context, the nil-rate band in 2025/26 is £325,000. If the total value of your assets, including your pension after April 2027, exceeds this threshold, your estate could face an IHT liability.
The good news is that there are often practical steps you can take to reduce a potential tax bill. Careful planning, guided by professional advice, can help you adapt to these changes and ensure your wealth is passed on as efficiently as possible.
Most pensions are set to be liable for Inheritance Tax, but there are some exceptions
According to the current proposals, most pensions are expected to fall within the Inheritance Tax (IHT) net from April 2027. This would apply to defined contribution pensions, defined benefit schemes, workplace pensions, personal pensions, and self-invested personal pensions (SIPPs). The inheritance tax changes 2025 UK announcement is therefore likely to affect a wide range of retirement savings.
That said, there are exceptions. Pensions that provide an income in retirement, along with certain types of annuities, may continue to sit outside of your estate. Similarly, pensions with a death-in-service benefit — which can provide your spouse, civil partner, or dependent children with a lump sum or regular income if you pass away — are also expected to remain exempt from IHT.
Currently, beneficiaries don’t usually pay IHT on inherited pensions, though they may be liable for Income Tax in some circumstances. If the proposed changes go ahead as planned, it could mean that inherited pensions are taxed twice — once through IHT and again through Income Tax.
The potential impact of these changes is significant. It may reduce how much you’re able to pass on to loved ones and, in some cases, make it less tax-efficient to use pensions as a wealth transfer strategy.
3 ways you could pass on wealth and reduce Inheritance Tax
If your original plan was to preserve your pension to pass on tax-efficiently, the inheritance tax changes 2025 UK announcement means your wider financial strategy may need to adapt. For some people, it could make more sense to use pension savings during their lifetime and pass on different assets instead. Here are three alternative approaches worth considering.
1. Gift assets to loved ones during your lifetime
One option is to pass on assets now, rather than waiting until after your death. This can provide support when your loved ones need it most — for example, helping children buy their first home or contributing towards school fees for grandchildren.
Before you start gifting, two things are important:
- Protect your own financial security. Make sure giving away assets won’t put your retirement plans at risk.
- Understand the gifting rules. Some gifts remain part of your estate for up to seven years (known as “potentially exempt transfers”), while others are immediately exempt.
Immediately exempt gifts include:
- Up to £3,000 each tax year
- Small gifts of up to £250 per person, per year (if no other allowance is used)
- A wedding gift of up to £1,000 (rising to £2,500 for grandchildren and £5,000 for children)
- Regular payments from surplus income, such as paying into a child’s savings account or covering rent for an elderly relative.
Making gifting part of your long-term financial plan can help you support loved ones now and reduce the IHT bill later.
2. Place assets in a trust
A trust allows assets to be held on behalf of beneficiaries. For IHT purposes, it can remove some wealth from your estate, while still allowing you to retain some control in certain cases.
Trusts come in many forms, and once assets are placed inside one, they can often be difficult or impossible to retrieve. Professional advice is essential to ensure the right trust is chosen and set up correctly.
3. Take out life insurance to cover an Inheritance Tax bill
Life insurance won’t reduce the size of your estate’s IHT bill, but it can give your loved ones a way to pay it. By covering the liability with a payout, your estate can be passed on intact without assets needing to be sold quickly to cover the tax.
It’s vital that any life insurance policy is written in trust. Without this step, the payout itself could be counted as part of your estate, which might increase the IHT liability instead of reducing the pressure.
Get in touch to talk about your estate plan
Whether you’re starting from scratch or reviewing an existing estate plan, we can help you understand what the inheritance tax changes 2025 UK could mean for you and the legacy you want to leave. We’ll work with you on an ongoing basis to make sure your estate and wider financial plan reflects both current policy and your personal needs. Please get in touch to start the conversation.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
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.
The Financial Conduct Authority does not regulate Inheritance Tax planning or trusts.
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