For those fortunate and foresighted enough to have built a decent-sized pension pot, there are some important changes on the horizon which will require a fresh look at any plans you had to pass on your wealth without Inheritance Tax (IHT) eating into it.

From 6 April 2027, virtually all unused defined contribution pension funds and pension death benefits will be formally brought into the deceased’s gross estate for IHT calculations.

This impending reform fundamentally reshapes how your estate will be administered and makes reviewing your legal Will an urgent priority. Karen Starkey, Partner and Head of the Private Client team at KWW Solicitors of East Molesey, looks at what’s in store.

Understanding the April 2027 rule change

Under current rules, death benefits from defined contribution pensions can typically be passed to beneficiaries via expression of wish forms without incurring IHT. The pension scheme trustees retain discretion over the fund, keeping it outside your taxable estate.

From Apri 2027, however, any unused pension funds or death benefits remaining upon your death will be added to the total value of your estate.

If your combined assets – including your home, savings, investments, personal possessions, and now your pension pot – exceed your available tax-free allowances, the excess will be subject to IHT, the headline rate of which is 40%.

Only around one in 20 UK estates currently pays IHT, largely because the vast majority fall below the £325,000 (Nil-Rate Band) and £500,000 (Residence Nil-Rate Band) individual allowances. (It is important to note that those allowances are transferable to the surviving spouse, giving a maximum threshold of £1 million, assuming the main residence is being left to the couple’s child or children).

However, because standard thresholds have been frozen through to 2030 while property values continue to rise, and unspent pensions are being added to the taxable total, tens of thousands of additional estates will be drawn over their applicable thresholds in the coming years.

Example

Let’s assume a family has assets of £800,000 alongside an unspent pension pot of £400,000. Under the old rules:

• The £800,000 estate fell comfortably within their £1m combined spousal allowance, so zero IHT was due.
• The £400,000 pension passed tax-free outside the estate.
• From 6 April 2027, that £400,000 pension is brought back into the gross estate valuation. The estate total becomes £1.2m. Even with the full £1m spousal allowance, the estate now exceeds the threshold by £200,000, creating a £80,000 IHT liability (40% of the excess).

Note: Higher net-worth families need to be mindful that the Residence Nil-Rate Band allowance begins to taper away over a £2m threshold.

Why your legal Will needs to be updated

Many clients mistakenly assume that estate planning is neatly divided into two separate silos: the ‘financial side’ managed by an adviser and the ‘legal side’ drafted by a solicitor. In truth, these two disciplines need to work seamlessly together, especially in light of the 2027 changes.

Here is why your Will requires immediate review alongside your financial portfolio:

Rebalancing asset distribution: If your estate plan previously assumed your pension would pass tax-free to children outside the Will while your property passed under the Will, your net inheritance proportions may be severely disrupted by unexpected tax bills.

Execution burden on Executors / PRs: The Government’s consultation response confirmed that Personal Representatives (Executors) rather than pension scheme administrators bear primary legal responsibility for valuing pensions, reporting to HMRC, and settling IHT liabilities.

Liquidity and tax payment: Inheritance Tax must usually be paid within six months of the end of the month in which the deceased died. With pensions now in the tax calculation, your executors must have clear instructions and powers within the Will to access liquid assets to settle tax liabilities without needing to rush the sale of family property.

Spousal transfers and exemptions: Transfers between legal spouses or civil partners remain exempt from IHT. Structuring your Will to ensure assets , including pension remnants, benefit from spousal exemptions where appropriate is vital to deferring tax until the second death.

Crafting a tax-efficient financial and legal plan

Mitigating the impact of the April 2027 changes requires a co-ordinated, multi-disciplinary approach. Mitigating IHT is not about finding loopholes, it is about utilising legitimate relief frameworks and structuring your legal affairs thoughtfully.

For example, your financial planner might suggest adjusting your retirement income strategy, perhaps drawing down on pension funds during your lifetime while preserving other assets, or utilising annual gifting allowances (£3,000 per year per donor, plus gifts out of regular income).

Concurrently, your legal representative will see if there are opportunities through trust mechanisms to shield wealth for future generations, control how beneficiaries receive their inheritance, and protect vulnerable heirs.

Furthermore, expression of wish forms held by pension providers must be audited alongside your Will to ensure there are no conflicting directives that could cause confusion or administrative delays during probate.

Take action before April 2027

While April 2027 may seem some time away, effective estate planning takes careful consideration and time to implement. Waiting until the legislation is actively enforced leaves little room to restructure assets, update legal documents, or consult with advisers.

At KWW, we can work alongside your financial advisers to ensure your Will, Lasting Powers of Attorney, and asset structures are in harmony. Protecting your family’s financial future requires a cohesive plan that bridges the gap between legal protection and tax efficiency.

Contact our Private Client team today to review your existing Will or schedule an estate planning consultation ahead of the April 2027 changes.

IMPORTANT: This article is for information only and should not be considered as formal legal advice. While KWW Solicitors is authorised and regulated by the SRA, the firm is not authorised to provide financial advice, so you should seek guidance from a specialist in that area.