UK pension inheritance taxes to increase from April 2027

New UK tax regulations set to take effect in April 2027 will bring unused pension pots into the scope of inheritance tax (IHT). This policy change, announced by former Chancellor Rachel Reeves, aims to end the practice of using pensions as a primary vehicle for tax-efficient wealth transfer to heirs.

Financial advisory firms have issued warnings regarding the potential severity of the tax burden. Claritas Tax estimates that wealthy individuals could face a combined tax rate of up to 67% when the 40% inheritance tax is applied to the pension's value, followed by income tax on the remaining amount. The firm suggests that traditional estate-planning strategies, such as preserving pension funds while depleting other assets, may no longer be optimal.

NFU Mutual has warned of an even steeper potential tax hit of up to 91% due to a perceived clash between inheritance and income tax rules. For beneficiaries inheriting funds from savers who die after age 75, the funds are subject to income tax at the beneficiary's marginal rate. Because large withdrawals can push beneficiaries into higher tax brackets, the combined effect of IHT and income tax could significantly reduce the value of inherited assets.