The 2027 "Pension Raid" Explained
From April 2027, a fundamental shift occurs in UK estate planning: unused defined contribution pension pots will be included in the value of your estate for Inheritance Tax (IHT) purposes.
Historically, pensions fell outside the estate, making them the ultimate tax-efficient legacy vehicle. The new rules effectively close this loophole, creating a potential "Double Tax" trap where beneficiaries may pay Income Tax on withdrawals after the estate has paid 40% IHT on the pot itself.
What is excluded (confirmed 21 July 2025): death-in-service benefits and dependants' scheme pensions from defined benefit or collective money purchase schemes stay out of scope, and the spouse / civil-partner and charity exemptions are maintained. Your personal representatives - not the pension scheme - report and pay the IHT on the pension, and can direct the scheme to withhold up to 50% of the taxable benefits for up to 15 months to fund it.
Understanding Your Allowances
Despite the changes, you still have powerful allowances available to reduce your bill:
- Nil Rate Band (NRB): The first £325,000 of any estate is tax-free. This amount has been frozen until April 2031 (extended at the Autumn Budget 2025).
- Residence Nil Rate Band (RNRB): An extra £175,000 allowance applies if you leave your main home to "direct descendants" (children, grandchildren, step-children, or adopted children).
- The "Million Pound" Couple: Unused allowances transfer to a surviving spouse. A married couple can combine their allowances (£325k + £175k each) to pass on up to £1,000,000 tax-free.
The £2 Million Taper Trap
If your total estate exceeds £2 million, the Residence Nil Rate Band is withdrawn at a rate of £1 for every £2 over the limit.
Crucial Warning: Because pension pots will be added to your total estate value in 2027, many people who thought they were below the £2m threshold will suddenly find themselves dragged above it, losing their £175,000 residence allowance. This is known as "Taper Drag."