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Inheritance Tax (IHT) continues to be one of the most complex and emotionally charged areas of financial planning. The tax itself is often described as “a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue,” as former Chancellor Roy Jenkins once put it.
But with the Government set to include pensions within estates for IHT purposes from 2027, that quote might soon need updating.
In this episode of Retire Well with Wealth of Advice, we look at real-life Inheritance Tax case studies and explore practical ways to reduce the potential impact — from pension planning and gifting to trusts and life insurance.
Currently, pensions sit outside your estate for Inheritance Tax purposes. If you pass away before age 75, your beneficiaries can usually receive your pension tax-free. After 75, withdrawals are taxed as income, but the funds themselves are not counted towards your estate.
From April 2027, that’s set to change. The Government has announced that some pension values will be included in estate calculations, bringing more households into the IHT net.
For many, this could mean rethinking how and when to draw pensions, make gifts, or update nominations.
Profile: Married, both 70, with a £600,000 home, £400,000 pensions and £300,000 in ISAs.
Their combined estate of £1.3 million is currently below the IHT threshold once both Nil Rate Bands (NRB) and Residence Nil Rate Bands (RNRB) are applied.
After 2027, however, their pensions will be included — leaving around £300,000 exposed to IHT, creating a potential £120,000 bill.
Planning strategies:
• Consider drawing from pensions sooner, particularly before age 75
• Use ISAs for inheritance or charitable giving
• Review wills to ensure both NRB and RNRB are optimised
• Consider spousal bypass trusts for flexibility
Profile: Age 58, £900,000 in assets and £500,000 in pensions, unmarried and without children.
Rachel plans to leave her estate to nieces and a charity. From 2027, part of her pension could fall within her taxable estate.
Planning strategies:
• Review and update pension death benefit nominations (DBNs)
• Leave 10% or more to charity to reduce IHT to 36%
• Consider a trust for pension benefits to retain control
• Explore equity release to make lifetime gifts
Profile: Age 75, widowed, £300,000 pension, £900,000 investments, £200,000 cash.
Tom regularly gives £10,000 per year to each of his three grandchildren. With changes coming, he’s keen to make sure those gifts remain tax-efficient.
Planning strategies:
• Use the “normal gifts out of income” exemption
• Consider withdrawing from pensions pre-2027 to fund gifts before they count towards IHT
• Larger gifts will be Potential Exempt Transfers (PETs), and will be subject to the seven year rule after seven years (PET rule)
• A will trust could help manage legacies long-term
Profile: Age 68, recently inherited £400,000 investments and £400,000 pensions.
Many surviving spouses are unaware that inherited pensions could become taxable under the 2027 changes.
Planning strategies:
• Consider whether a Deed of Variation could help redirect inherited assets
• Weigh up drawing pension funds now versus leaving them to grow
• Ensure estate planning reflects the new pension rules
Profile: Both 65, £350,000 home, £200,000 pensions, £300,000 cash/investments.
Although not currently subject to IHT, Chris and Helen want to plan early to make tax-efficient gifts.
Planning strategies:
• Gift up to £325,000 each using NRBs without immediate IHT
• Use Residence Nil Rate Band (RNRB) for the family home
• Make early potentially exempt transfers (PETs) to reduce the estate over time
• Review your pension death benefit nominations before 2027
• Consider making lifetime gifts or drawing pension funds strategically
• If over 75, remember pension withdrawals for beneficiaries are taxed as income
• Explore life insurance to offset IHT on gifts or the estate
• Keep wills, trusts and pensions aligned and up to date
The 2027 rule changes mark one of the most significant shifts in Inheritance Tax planning for decades. Whether you intend to spend it, gift it, insure it or leave it, the key is to plan ahead.
With careful preparation, you can ensure more of your wealth goes to the people and causes that matter to you — not the taxman.
If you want a better view of what your future could be, we'll have a chat and work out if we make a good fit for you and your financial picture.
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