WARNING! April 6^th 2027 is less than 12 months away.

Currently, most unused private pension funds are passed on to beneficiaries free of Inheritance Tax (IHT) because the scheme administrator decides who receives the money.

However, for deaths on or after April 6, 2027, unused pension funds and death benefits will be counted as part of your estate for IHT purposes.  

This new taxation on unused pension funds will bring a lot more family estates within the qualifying for IHT.

This change is effective for deaths on or after 6 April 2027. If the pension scheme member dies before 6 April 2027, then the current rules will apply even if pension benefits are paid to their beneficiaries after this date.

The words “unused pension funds” means the combined values of all your pension funds that you held which you have not used up to pay for your income in retirement.

It is worth just recapping on the basics of IHT and how it affects family estates.

From 6 April 2017, the rules on Inheritance tax changed, providing for an additional "family home" allowance called the residence nil rate band (RNRB) or additional threshold where an individual has a qualifying property that forms part of their estate. In 2025/26 the standard Inheritance Tax threshold (nil rate band) remains unchanged on 2025/26 band at £325,000, the residence nil rate band also remains unchanged at £175,000.  Individuals can still pass on assets - which include the family home - to their children or grandchildren worth up to £500,000, with no Inheritance tax liability.  Bear in mind that these are per person, so a couple could still pass on up to £1 million, and there is no IHT between married couples and legal partners.

Certain lifetime gifts can be made without giving rise to an inheritance tax charge. For 2025/26 the annual gift exemption is £3,000 and it is worth considering making a gift of this amount if you are in a position to do so.

In addition, if you did not use all of your £3,000 annual exemption in the previous tax year, you can carry the unused balance forward for one tax year only. To use any unused exemption from 2024/25, you must also use your full 2025/26 annual exemption before 5 April 2026. If unused after that, it is lost.

Unlimited gifts can also be made in the form of Potentially Exempt Transfers (PETs). Provided you live for 7 years after making the gift, it will be free of inheritance tax.

Please ensure that, should a gift be made by cheque, sufficient time is given for the cheque to clear before 5th April; otherwise it will not be included in the current year’s total.

Gifts of £250 can be made to any number of separate individuals without giving rise to an inheritance tax charge. Gifts of varying amounts can also be made between family members on the occasion of a wedding/civil partnership ceremony, without any inheritance tax liability.

Tax advice which contains no investment element is not regulated by the Financial Conduct Authority (FCA). Information regarding taxation levels and basis of reliefs are dependent on current legislation and individual circumstances, are not guaranteed and may be subject to change.

Best wishes

Ray