Key takeaways:
- From April 2027, defined contribution pensions will be included in estates for inheritance tax
- UK homeowners with average property values and moderate pensions could face new IHT liabilities
- Married couples can transfer nil-rate band; cohabiting partners cannot
- Regional property values significantly affect potential tax exposure
Pension inclusion in estates from 2027 could create new IHT liabilities
According to Quilter, a working-age single homeowner with a property worth £290,395 and a pension pot of £415,000 could face this bill, due to rules that mean a person’s pension will count towards their estate for IHT purposes regardless of age at death.
Previously, unspent pensions were passed on tax-free if someone died before the age of 75.
Impact on cohabiting families without spousal exemptions
This also means that cohabiting families with young children who do not benefit from the spousal exemption or a transferable nil-rate band could be exposed to the tax.
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For joint homeowners where half of a property’s value is typically included in the estate, they could face an IHT bill of £24,079 because of the pension inclusion.
How the inheritance tax will affect homeowners regionally
In London, a sole owner of a home worth £565,637 with a £415,000 pension could have an IHT bill of £192,254 in 2027, while for joint owners, this will be £129,127. Quilter said this would still be a “severe hit” for grieving families who did not have the same protections as married couples.
Further, in Wales, Scotland and Northern Ireland, where house prices are lower and there was previously no IHT liability for families with similar pensions, joint owners could face bills of £23,891, £21,392 and £20,007 respectively.
Quilter said these liabilities would rise further if house prices increased before the rules came in.
Industry response to the proposed inheritance tax changes
Jon Greer, head of retirement policy at Quilter, said: “Charging inheritance tax on a pension someone could not access and will never be able to use due to passing away before the minimum pension age is optically terrible for the government. It is even more unjust for cohabiting families who have no spousal relief or ability to transfer tax allowances.
“A grieving family with young children and an average-priced home could face six-figure IHT bills at the most distressing time.”
Greer added: “Married couples are protected by exemptions and allowances; cohabitees aren’t. Policymakers should consider carve-outs or transitional reliefs for working-age deaths, particularly when young children are involved.
“Without change, this policy risks compounding the emotional toll of bereavement with a financial hit that can destabilise a family’s future despite raking in very little in additional revenue.”
Last week, it was reported that Chancellor Rachel Reeves was considering changes to the IHT gifting allowance, such as a cap on lifetime gifting and the tapered rates applied depending on how many years before death assets are gifted.
Country and regional inheritance tax estimates
| Country and government office region | Price | Nil-rate band (NRB) and residence (NRB) | Current IHT | Pension | Excess above NRBs | IHT | IHT (joint ownership) |
| England | £290,395 | £500,000 | £0.00 | £415,000 | £205,395 | £82,158 | £24,079 |
| Northern Ireland | £185,037 | £500,000 | £0.00 | £415,000 | £100,037 | £40,015 | £3,007 |
| Scotland | £191,927 | £500,000 | £0.00 | £415,000 | £106,927 | £42,771 | £4,385 |
| Wales | £209,580 | £500,000 | £0.00 | £415,000 | £124,580 | £49,832 | £7,916 |
| East Midlands | £242,052 | £500,000 | £0.00 | £415,000 | £157,052 | £62,821 | £14,410 |
| East of England | £339,747 | £500,000 | £0.00 | £415,000 | £254,747 | £101,899 | £33,949 |
| London | £565,637 | £500,000 | £26,255 | £415,000 | £480,637 | £192,255 | £79,127 |
| North East | £159,142 | £500,000 | £0.00 | £415,000 | £74,142 | £29,657 | £0 |
| North West | £209,498 | £500,000 | £0.00 | £415,000 | £124,498 | £49,799 | £7,900 |
| South East | £380,650 | £500,000 | £0.00 | £415,000 | £295,650 | £118,260 | £42,130 |
| South West | £304,237 | £500,000 | £0.00 | £415,000 | £219,237 | £87,695 | £26,847 |
| West Midlands Region | £244,262 | £500,000 | £0.00 | £415,000 | £159,262 | £63,705 | £14,852 |
| Yorkshire and the Humber | £203,836 | £500,000 | £0.00 | £415,000 | £118,836 | £47,534 | £6,767 |
