Pension Inheritance Tax 2027: How Much Could It Cost Your Family?

These figures assume the whole pension sits above your allowances, that your estate is already over £1 million once the pension is added on top, and that the rate stays at 40%. Tax rules and reliefs depend on your own circumstances and can change over time, so the value of any allowance will vary from person to person and cannot be guaranteed. Treat this table as the shape of the problem rather than a forecast of your bill.

There is a second reason not to treat any of these numbers as fixed. A pension is invested, so its value can rise and fall between now and whenever it is eventually inherited. Staying invested over longer periods can reduce the impact of short-term ups and downs, although it does not guarantee a positive outcome and you could get back less than you put in.

The Double Tax Trap Most People Miss

There is a second charge that catches almost everyone by surprise: income tax on top of Inheritance Tax.

If you die after age 75, whoever inherits your pension pays income tax at their own rate when they draw money from it. Layer that on top of the new Inheritance Tax charge and the arithmetic gets uncomfortable.

Take £100,000 of unused pension passing to an adult child after your 75th birthday.

• Inheritance Tax of 40% takes £40,000, leaving £60,000.
• The child draws that £60,000 and pays income tax at their own rate.
• A higher rate taxpayer pays £24,000, so £36,000 arrives. An effective rate of 64%.
• An additional rate taxpayer pays £27,000, so £33,000 arrives. An effective rate of 67%.

One piece of relief is worth knowing about. Income tax is not charged on the slice of the fund used to pay the Inheritance Tax, so the same money is not taxed twice over. That relief is already built into the figures above. It softens the blow. It does not remove it.

This is the part people find genuinely shocking the first time they see it written down, and it is why the conversation is worth having early rather than late. Whether anything can be done about it in your case depends on your own circumstances, your beneficiaries’ tax position and the rules in force at the time, so this is not a problem with a single answer that suits everyone.

The £2 Million Threshold Almost Nobody Talks About

Here is the one that quietly catches people out.

The residence nil rate band, that extra allowance of up to £175,000 per person for a main home passing to children or grandchildren, starts to be withdrawn once an estate is worth more than £2 million. It falls by £1 for every £2 above that line.

From 6 April 2027, unused pension funds count towards that £2 million test.

Take a couple whose home and other assets come to £1.8 million, with £600,000 of pensions between them. Under today’s rules the estate being tested on second death is £1.8 million, comfortably under the line, and the full residence allowance is available. From 2027 the figure tested is £2.4 million. That is £400,000 over the threshold, so the residence allowance could be cut by up to £200,000, costing a further £80,000 in tax on top of the 40% now due on the pension itself. This is where planning is going to be so important.

How this plays out depends heavily on the order of deaths, what the wills say and what else sits in the estate, which is exactly why it is worth working through properly rather than on the back of an envelope.

A Worked Example: A Fleet Couple With A £1.6 Million Estate

The figures below are a generic illustration to show how the rules work. They are not a recommendation, and they are not based on a real client. Your own position will almost certainly look different.

Picture a couple in their late sixties in Fleet. Between them they have:

• £750,000 main home
• £200,000 in ISAs and other savings
• £600,000 in one defined contribution pension
• £50,000 of other assets

Total estate: £1.6 million.

One of them dies first and leaves everything to the other. No Inheritance Tax is due, because anything passing between spouses is exempt. So far, so familiar.

The picture changes on second death, when the children inherit.

Under today’s rules the £600,000 pension would generally sit outside the estate. The taxable estate would be £1 million, the couple’s combined allowances would be £1 million, and the Inheritance Tax bill would be close to nothing.

From 6 April 2027 the pension counts. The taxable estate is £1.6 million, the allowances are still £1 million, and £600,000 is exposed at 40%. That is an Inheritance Tax bill of up to £240,000.

Same house. Same savings. Same pension. £240,000 of difference.

Whether any of that can be planned for depends on the couple’s circumstances, their wider plans and the rules that apply when the time comes. For some families there is real room to act. For others there is not, and the honest answer is to plan for the bill rather than pretend it can be made to disappear. Either way, knowing the number beats guessing at it.

It is for reasons like this, you really should speak with an adviser and we offer a no obligation, no commitment Inheritance Consultation.

Six Questions To Ask Yourself This Month

Before you decide whether to do anything, work out where you actually stand. Sit down, ideally with your partner, and answer these honestly.

1. 1. What is our total estate worth? House, savings, investments, pensions, business interests, any life cover not written in trust. Everything.
   2. How much of that sits in pensions? The higher the proportion, the bigger the 2027 impact.
   3. Are we anywhere near £2 million once pensions are counted? If so, the residence allowance question applies to us.
   4. Who do we want to inherit what? A spouse, children, grandchildren and charities are all treated differently.
   5. What tax rate are our beneficiaries likely to be on? A higher rate taxpayer child loses considerably more to the double charge than a basic rate one.
   6. When did we last look at our wills and our pension expression of wish forms? If the answer is that we are not sure, that is a finding in itself.

If those questions produce more uncertainty than confidence, you are in the majority, and you are exactly who Part 3 is written for.

Common Questions About Pension Inheritance Tax In 2027

Your Next Step: A No Obligation 2027 Inheritance Tax Review

If you would rather see the numbers on your own situation than try to hold them in your head, we offer a no obligation initial conversation for people aged 50 and over across Hampshire, Surrey, Berkshire and London.

We will look at your pension, your wider estate and your wishes for the people you care about, and explain in plain English how the 2027 changes are likely to affect your family. That part comes first. What to do about it, if anything, comes after.

Book your 2027 Inheritance Tax review here or call 01252 984 733.

Wilcox Day Wealth Management is based in Fleet, Hampshire, and works with clients across Fleet, Farnham, Camberley, Hook, Odiham, Basingstoke, Farnborough, Guildford, Woking, Bracknell, Reading and London.

The Full Three Part Series

Part 1: What the April 2027 pension Inheritance Tax change means for you and your family (read Part 1).

Part 2 (this article): How much it could cost, the double tax trap and a worked example.

Part 3: Five things you can look at to reduce the impact, and the trade offs that come with each.

The information in this article is based on our understanding of UK legislation and HMRC practice as at August 2026, which may change in the future.

This article is for general information only and does not constitute personal financial advice.

Will writing involves the referral to a service that is separate and distinct to those offered by St. James's Place. Wills are not regulated by the Financial Conduct Authority.

Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.