UK pension savers rethink estate planning as inheritance tax changes widen exposure

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UK pension estate tax changes

Highlights

From April 2025, UK pensions lose their inheritance tax exemption, making unused pension assets above £325,000 subject to a 40% tax charge.
Nearly 50,000 people annually could pay some or more inheritance tax due to this change, including non-UK residents holding UK pensions from 2027.
Inheritance tax on pensions can reach £40 per £100, and combined with income tax, the total tax take may rise to £67 in certain cases.

Pension tax change reshapes legacy planning

As reported by Financial Times, changes announced in the November 2024 Budget bring pensions back within the scope of UK inheritance tax from April next year, reversing an exemption introduced in 2015. For estates above the £325,000 threshold, unused pension assets can face a 40% inheritance tax charge, reducing what children and other non-spousal beneficiaries receive.

Tim Smith, legal director at Eversheds Sutherland, says analysis based on HM Revenue & Customs policy paper data shows that from 2027 nearly 50,000 people each year are likely to pay some or more inheritance tax than before. He adds that the wider reach also affects people who are not tax resident in the UK but hold UK-based pensions.

The rule change is pushing retirees and savers to review strategy earlier rather than simply building up pension wealth and leaving it untouched. Advisers say surplus capital, sometimes described by estate planners as "red money", now needs a clearer plan if the aim is to maximize what passes to descendants or other beneficiaries.

Advisers point to spending, gifting and trusts

Les Cameron, retirement savings and tax expert at M&G, says saving beyond what is needed is becoming less attractive for inheritance tax reasons, while Claire Trott, head of advice at St James's Place, says earlier action gives savers more flexibility. Rachel Vahey at AJ Bell warns that pensions can become a costly vehicle for inheritance, especially when a person dies after 75 and beneficiaries may have to pay income tax on remaining funds after inheritance tax has already been applied.

Vahey calculates that for every £100 in a pension, inheritance tax could remove £40, and income tax on what remains could lift the total tax take to £67 in some cases. That marks a break from earlier advice that often favored leaving as much as possible inside a pension wrapper.

Advisers say options that do not require more complex specialist investments include spending more in retirement, while still accounting for later-life care costs, or making regular gifts from surplus income before retirement. Clare Moffat at Royal London says the regular-giving-from-income exemption has been underused, even though in principle there is no limit if the gifts come from income, are made regularly and do not reduce the giver's standard of living.

If those methods are not suitable, trusts remain a fallback, provided the person survives seven years after placing assets into them. Whole-of-life insurance policies written into trust are also drawing interest, with Swiss Re data showing the average policy size rises nearly 52% in 2025 from the previous year to £194,431.

In our earlier article, we covered the case of a Puerto Rican chiropractor who pleaded guilty to filing a false tax return tied to an abusive trust-based tax shelter. Prosecutors said the structure used trusts and a fraudulent foundation to disguise personal spending as deductible expenses and conceal income, highlighting the legal risks of misusing trusts and similar vehicles for tax purposes.

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