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Inheritance Tax (IHT) and Pensions – The “Safe Haven” is about to Disappear
John-Paul Dennis
For many years, pensions have been one of the most effective tools for IHT planning, allowing individuals (particularly business owners and senior professionals) to pass on substantial wealth outside of their taxable estate. However, significant legislative changes coming into force from 6 April 2027 will fundamentally alter this position.
Under the new rules, unused pension funds and most pension death benefits will be included within the value of an individual’s estate for IHT purposes. This change represents a major shift in how wealth is treated on death and will have wide-ranging implications for estate planning, succession strategies, and tax exposure.
In this article, John-Paul Dennis, Partner & Divisional Director for Private Client at our sister brand Jackson Lees, explains what is changing, why it matters and what practical steps individuals should now consider to mitigate risk and protect their wealth.
Why Will Changes to Pension IHT Rules Matter for Business Owners and Directors?
Many business owners, partners and directors have deliberately built up pension wealth rather than drawing on it, treating pensions as a tax-efficient succession tool.
That strategy is now at risk:
- Pension wealth will count towards the taxable estate and may attract 40% IHT above available allowances
- Estates that previously had no IHT exposure could now become liable to tax
- Pension assets will compete with other assets for available nil rate bands
- Business assets held within pensions will not benefit from business relief
For owner-managed businesses, the impact can be particularly acute. Where commercial property or trading assets are held in pensions (e.g. SIPPs/SSASs), the next generation could face a tax liability that forces real-world decisions – potentially even a sale to fund IHT. Business relief from inheritance tax doesn’t apply to assets held in a pension wrapper.
How Do Pension Changes Fit Within the Wider Shift in IHT Policy?
This sits alongside a broader tightening of the IHT regime:
- Reliefs for business and agricultural assets are being restricted and capped
- Nil rate bands remain frozen, quietly pulling more estates into tax
- HMRC’s clear policy direction is to limit the use of structures designed primarily to avoid IHT
The message is clear: historic planning assumptions are being dismantled.
What Should Individuals Do Now to Reduce Future IHT Exposure on Pensions?
The key risk is inertia. Many individuals still assume pensions sit outside their estate and have not revisited their planning.
Steps to consider include:
- Reviewing Wills to ensure they still align with the new tax position
- Reassessing pension nomination forms and intended beneficiaries
- Taking financial advice as to whether pension funds should be drawn during lifetime rather than preserved
- Exploring alternative strategies (gifting, trusts, insurance) to manage IHT exposure
- Taking a holistic view across business assets, personal wealth and pensions
Crucially, planning needs to be integrated. Pension strategy can no longer sit in isolation from estate planning.
What Is the Overall Impact of Pension IHT Changes on Succession Planning?
Pensions have moved from being one of the most effective IHT shelters to potentially one of the biggest drivers of tax exposure.
For many business owners and senior professionals, this change will not increase tax at the margins -it will fundamentally reshape succession planning.
Those who act early will have options. Those who do not may leave their families and businesses facing avoidable tax and difficult decisions.
Contact us
Please contact John-Paul Dennis, Partner & Divisional Director for Private Client at our sister brand Jackson Lees:
T: 0151 282 1700
