Estate Planning · Pension Planning
Key points at a glance
- Inheritance tax (IHT) is charged at 40% on the part of an estate above the tax-free allowances. In 2026/27 a married couple can usually pass on up to £1 million, including a family home left to children.
- Gifts are usually free of IHT if you live for seven years after making them, and some gifts are exempt straight away.
- A life insurance policy written in trust usually pays out outside your estate, and can pay an IHT bill without waiting for probate.
- From 6 April 2027 most unused pension funds will count towards your estate. This is now law, in the Finance Act 2026.
- This is general information only, not advice for your circumstances.
“Will my family have to pay inheritance tax?” Until recently most people could answer no without much thought. House prices, allowances that have stayed the same for years and, from April 2027, pensions counting towards the estate mean more families are now close to the line. This guide explains how the tax works, the allowances and exemptions you can use, and what changes for pensions.
How inheritance tax works
When someone dies, everything they own is added up: property, savings, investments, possessions, and from 6 April 2027 most unused pension funds. Debts and funeral costs are taken off. Tax is then charged at 40% on the part above the allowances.
- Nil-rate band: £325,000 per person (2026/27).
- Residence nil-rate band: up to £175,000 more (2026/27) when your home, or your share of it, passes to children or grandchildren, including step and adopted children.
- Married couples and civil partners: anything left to each other is exempt, and any allowance the first person did not use passes to the survivor. Together that can mean up to £1 million passing tax free.
- Larger estates: the residence nil-rate band is reduced by £1 for every £2 the estate is worth over £2 million, so it disappears entirely at £2.35 million for one person.
- Gifts to charity are exempt.
Executors usually have to pay the tax by the end of the sixth month after the death, often before the house can be sold. That timing matters as much as the size of the bill, and it is one reason people plan ahead.
Gifts and the seven year rule
Most gifts to people are “potentially exempt”. If you live for seven years after making the gift it falls out of your estate. If you die within seven years it is counted, and where the gifts add up to more than the nil-rate band, the tax on them falls on a sliding scale after three years (taper relief).
Some gifts are exempt straight away (2026/27):
- Annual exemption: £3,000 a year in total, and you can carry one unused year forward.
- Small gifts: up to £250 per person a year, to anyone who has not had part of your £3,000.
- Wedding or civil partnership gifts: £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else.
- Regular gifts out of surplus income: no limit, as long as they come from income rather than capital, are made regularly, and leave you able to keep your usual standard of living. Good records are essential.
Two traps catch people out. Giving something away but still benefiting from it, such as giving your home to your children and carrying on living in it rent free, usually means it still counts as yours. And a large gift today can leave you short later, particularly if you need care. Gifting works best when your own future income is planned first.
Trusts and life insurance
A life insurance policy written in trust usually pays out to the people you choose without forming part of your estate, and without waiting for probate. A whole of life policy written in trust can be sized to cover an expected IHT bill, so your family does not have to sell assets to pay it. The cost is the premiums, which rise with age and health, and the cover only helps if it is kept up.
Trusts can also hold investments or gifts while keeping some control over who benefits and when. Some trusts have their own tax charges and reporting, so they need setting up with care. We advise on writing protection policies in trust and on pension nominations. Wills and lasting powers of attorney are prepared by a solicitor we can introduce you to, and an up-to-date will is the starting point for any estate plan. If we introduce you to a solicitor, we receive a referral fee from them; we will tell you about it before you decide.
Pensions and inheritance tax from 6 April 2027
Until now, most defined contribution pensions (personal pensions, SIPPs and most workplace pensions) have sat outside your estate. The Finance Act 2026 changes that for deaths on or after 6 April 2027: most unused pension funds and pension death benefits will be added to the estate when working out the tax.
- Spouses and civil partners: a pension left to them stays exempt.
- Death in service benefits paid from a registered pension scheme are excluded.
- Defined benefit pensions: dependants’ pensions paid from a defined benefit (final salary) scheme generally stay outside the estate. We plan around defined benefit pensions; we do not advise on transferring out of them.
- Who pays: the executors report and pay any tax due on the pension, and can ask the pension scheme to pay it directly from the fund.
Counting the pension can push an estate over the allowances, and over £2 million it can also reduce the residence nil-rate band. When the change was announced, the government estimated that around 10,500 estates a year would pay inheritance tax that would not have done before, and that more would pay more.
The double tax on pensions inherited after 75
If you die aged 75 or over, whoever inherits your pension also pays income tax on what they draw from it. Where IHT applies too, the combined tax can be high.
Illustrative example A £300,000 pension passes to an adult child who is a higher-rate taxpayer, where the rest of the estate already uses the allowances. IHT at 40% leaves £180,000. If the child then draws it all as a higher-rate taxpayer, income tax at 40% leaves around £108,000, or 36% of the original pot. This is an illustration only: the result depends on the whole estate, the allowances available and the beneficiary’s own tax position.
If you die before 75, beneficiaries can usually draw an inherited pension free of income tax, although IHT may still apply. If you are already retired, our article on the April 2027 change if you are already retired looks at the order in which you spend your pension, ISAs and savings.
Business and farm assets
Business property relief and agricultural property relief changed from April 2026. If you own a trading business, shares in an unlisted company or farmland, the old assumption that it will pass free of IHT may no longer hold, and it is worth getting specific advice.
A sensible order of steps
- Work out the rough size of your estate, including your home, pensions and any life cover not written in trust.
- Check your will is up to date and reflects what you want now.
- Check who you have nominated to receive each pension, and whether the policies you have are written in trust.
- Plan your own retirement income first, so you know what you can afford to give away.
- Then look at gifts, trusts and insurance, starting with the simple exemptions.
If you would like to talk it through before deciding, the first conversation is free and carries no obligation. See our estate planning and inheritance tax advice in Kent and how our fees work.
Concerned about how these changes affect you?
As an independent Chartered Financial Planner based in Hartley, Kent, I provide whole‑of‑market pension and estate planning advice tailored to your circumstances. If you would like to understand how the April 2027 changes affect your pension and estate, I would be happy to help. The initial conversation is free and carries no obligation.
No obligation · No cost · In person or by video call
Sources
- GOV.UK - Inheritance Tax: thresholds, rules and allowances
- GOV.UK - Inheritance Tax: gifts
- HMRC - Inheritance Tax: unused pension funds and death benefits, November 2025
- legislation.gov.uk - Finance Act 2026
Important information
The information on this page is for information purposes only and does not constitute individual financial advice.
The value of investments may fall as well as rise. You may get back less than you originally invested.
Pensions are a long-term investment. You may get back less than you put in. Pensions can be and are subject to tax and regulatory change; therefore, the tax treatment of pension benefits can and may change in the future.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION ADVICE.
INHERITANCE TAX PLANNING, WILL WRITING, TRUSTS AND TAXATION ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
The rules described reflect our understanding of legislation, including the Finance Act 2026, and HMRC guidance as at October 2026, and may change. Tax treatment depends on individual circumstances. Figures are for the 2026/27 tax year. The Financial Conduct Authority does not regulate will writing, trusts or some forms of estate planning. Wills and lasting powers of attorney are provided by a third party, not by KMD Financial Planning LLP. If we introduce you to a solicitor, we receive a referral fee from them; we will tell you about it before you decide.
About this article
All details are correct at the time of writing (see the date at the top of this article). Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored advice and is for information purposes only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on individual circumstances.
The value of investments can go down as well as up, and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
