Households face new £140,000 bill after pension Inheritance Tax change

Households could be slapped with a £140,000 tax bill after Inheritance Tax changes put in place by Rachel Reeves set to take effect from 2027.

Last year, the Chancellor announced that pensions would no longer be exempt from Inheritance Tax, and instead would begin to be included in the value of an estate, along with property, cash and other assets. It means that those who built up a private pension pot through work would be more likely to exceed Inheritance Tax thresholds when they die and pass money to family, once the change takes effect from April 2027.

Now, financial experts are warning that the chance could see households stung with bills of as much as £140,000. Royal London says that the addition of pensions to the value of estates means many more will end up paying tax on inheritance.

Currently, you can leave £325,000 tax-free to anyone, or £500,000 including a property. If you're married, you can leave your assets to your spouse and they can then add your allowance to their own when they die, doubling up the allowance to £1M including a property.

Royal London says: "The best way to explain the inheritance tax changes is with an example. We will look at Khalid and Amira, who are married. Sadly, Khalid dies in 2024, and he leaves everything to his wife Amira. Then Amira dies in May 2027. We are assuming that the law on inheritance tax and pensions will have changed to take effect from 6 April 2027.

"We will also assume that Amira owns a house worth £400,000, that she has £100,000 of investments in ISAs, has her own pension worth £200,000 and that she inherited a pension from Khalid in 2024 which is now worth £650,000. Before April 2027, when pensions weren't generally subject to inheritance tax, there would have been no inheritance tax bill because the estate was worth £500,000.

"That means it would have been under the £1 million limit that could have been passed onto someone other than a husband, wife or civil partner, with no inheritance tax to pay.

"However, with the change meaning that pensions are subject to inheritance tax from April 2027, the total estate would now include pensions and would be worth £1,350,000. This means that £350,000 would be subject to inheritance tax at 40% which will be £140,000."

One way to avoid this tax sting could be to give more money away, the firm says. It adds: "This isn't something new, but it might be useful if your estate (the value of your property, investments and other assets, including your defined contribution pension or pensions) will just be over the inheritance tax threshold. You might want to think about giving away more money when you are alive, especially if you've received the pension from your husband or wife and will be passing on your estate to children or other family or friends."