Kirk Rice Blog

Inheritance Tax Alert: Why Planning Ahead Matters More Than EverWritten on November 11, 2025 by Lisa Smith

Lisa Smith | Financial Planner

Key points

• From April 2027, unused pension funds and death benefits will be included in your estate for inheritance tax (IHT) purposes.
• This change might lead to double taxation — IHT on the estate and income tax when beneficiaries withdraw funds.
• Pension consolidation may help simplify estate administration, improve liquidity for beneficiaries and optimise use of allowances.
• Frozen thresholds and fiscal drag mean more families are being drawn into the IHT net, increasing potential liabilities.
• Early, proactive planning may help protect your wealth, preserve reliefs and support a smoother transfer of assets to your family.

Inheritance Tax (IHT) is becoming an increasing concern for families across the UK and the pressure is about to intensify.

For the first time pensions will be included in your estate for IHT purposes, and there are currently no plans to remove IHT on pensions or increase the tax-free cash allowance (£268,275).

What’s Changing?

Traditionally pensions have always been taxed on death. Only from April 2015 to 2027 were they not and as a result pensions have been one of the most tax-efficient ways to pass on wealth:

• Before age 75: Beneficiaries could inherit pension pots tax-free.
• After age 75: Income tax applied, but not IHT.

That is about to change – From April 2027, any unused pension funds and death benefits will be treated as part of your estate for IHT purposes.

What has worked over the last decade or so does not work now. From April 2027, unused pension funds and death benefits will be treated as part of your estate for IHT purposes.

This means they could be taxed at 40% if your estate exceeds the nil-rate band (£325,000) and residence nil-rate band (£175,000).

Double taxation will apply meaning IHT on the estate and income tax when beneficiaries withdraw funds.

As pension pots continue to grow, more families, particularly those in the middle-income bracket are being drawn into the inheritance tax (IHT) net, significantly increasing the taxman’s share. Even worse, this can result in the loss of valuable reliefs such as the Residential Nil Rate Band (RNRB).

With key allowances frozen, fiscal drag is quietly pulling more estates into IHT territory, leaving many households exposed to unexpected liabilities.

To put this into context, a joint couple with an estate above £2.7 million could lose the RNRB entirely resulting in an additional £140,000 IHT bill.

Key Allowances to Remember

• Nil Rate Band (NRB): £325,000 per individual
• Residential Nil Rate Band (RNRB): Up to £175,000 per individual (tapered for estates over £2 million)

If your estate is likely to exceed these thresholds, proactive planning around pension access and structure is essential.

Why Pension Consolidation Matters Now

With pensions soon falling under IHT rules, leaving multiple pots untouched could lead to unnecessary tax complications. Consolidating pensions can provide several key benefits:

• Simplified Estate Administration
  Multiple schemes complicate IHT reporting. Executors must calculate and pay IHT before funds are released. Consolidating pensions streamlines this process and reduces delays.
• Improved Liquidity for Beneficiaries
  Some providers delay releasing funds until probate and inheritance tax (IHT) are fully settled, which can create unnecessary hardship for beneficiaries. Consolidating pensions with a more flexible provider can ensure quicker access to funds. In fact, many pension companies struggle to meet their own transaction deadlines, potentially delaying the ability of personal representatives to obtain probate within a reasonable timeframe.
• Better Visibility for Planning
  Consolidation makes the what if scenario and estate valuation clearer which will be critical when pensions push estates over the £2 million threshold, reducing RNRB entitlement.
• Efficient Use of Allowances
  With new rules like the Individual Lump Sum Allowance (ILSA), consolidation helps avoid fragmented allowances across multiple schemes.
• Control Over Investment Strategy
  For many, growing pension pots is no longer the priority. Instead, the focus should be on optimising tax wrappers and aligning investments with long-term goals.

How a Kirk Rice Financial Planner Can Help

• Create strategies to protect your wealth and legacy
• Adapt your plan to changing tax rules and fiscal pressures
• Work with your objectives to secure your family’s future

The world has changed so your financial strategy should too. Let us help you navigate these complexities and safeguard your legacy and family’s future. Get in touch with us: info@kirkrice.co.uk

Please note: This article is correct as at the publication date. The answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of relief from taxation are subject to change. The Financial Conduct Authority does not regulate tax planning.