Chancellor John Healey (Image: Getty)
Chancellor John Healey is to launch a stealth increase in inheritance tax next year. It will eventually raise £1.46 billion for the Treasury – every year – at the expense of grieving families. of course, it comes on top of existing inheritance tax obligations. And personal finance experts warn that older people are already panicking at the thought of even more of their savings going to the Government instead of loved-ones.
The windfall for the Treasury will come from charging inheritance tax on unused pension pots. Many people save into a pension while they are working, often with contributions from an employer too, and use the money once they retire. But they may die before they spend it all. In fact, a lot of retirees plan their spending carefully, to ensure the cash does not run out while they are still alive.
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In the past, unused pension pots could usually be passed on to a loved one without being liable for inheritance tax.
It might still be taxed in other ways. For example, in some cases a beneficiary who inherits a pension pot might be charged income tax when they withdraw money from it.
But Labour have now decided pension pots will be liable for inheritance tax too.
The new rule comes into force in April 2027. And the Treasury says it will raise £640 million, increasing to £1.46 billion a year by 2029-30.
That’s more money from the Government, taken directly from the beneficiaries of the deceased – such as children whose parents have died.
Former Chancellor Rachel Reeves announced the policy, and the current Chancellor, John Healey, is sticking with it.
Predictably, older people who know about the change are already worried, although there are probably many others who don’t even know about it.
A report by financial advisers Quilter found retirees are stepping up the amount they hand over in gifts, in an attempt to reduce the amount they leave in their wills, even though six in ten are worried about running out of money to fund themselves.
The average retiree now gives £2,272 a year to relatives and spends a further £2,250 on education costs for children and grandchildren. Together, this amounts to £4,522 a year.
This report shows that the planned inclusion of unused pension pots for inheritance tax has changed how people use their money. More than a quarter (29%) plan to spend more of their pension savings during their lifetime, 26% intend to gift more of their pension wealth, and 24% expect to access their pension earlier than originally planned.
Steven Levin, CEO of Quilter, said retirees are helping their families more, but added: “Many people are making these decisions against a backdrop of economic uncertainty and significant changes to the retirement landscape, leaving many concerned about their own financial future.”
It’s another example of Labour’s desperation to raise cash to pay for their spending plans, and willingness to use older people as a source of income.
John Healey’s £1.46bn Inheritance Tax Change Begins in April – What Families Need to Know
A major change to Britain’s inheritance tax system is due to come into force next April, bringing most unused pension funds and pension death benefits into the inheritance tax net for the first time.
The reform is expected eventually to raise around £1.46 billion a year for the Treasury, according to the government’s original costing. It is therefore attracting intense attention from pensioners, families and financial advisers, particularly as the change approaches its implementation date of 6 April 2027.
The policy was announced under former Chancellor Rachel Reeves at the Autumn Budget 2024 and is being implemented under current Chancellor John Healey. It has already become a politically contentious issue, with critics arguing that families could face additional tax bills when pension savings are passed on.
However, the official rules are more complicated than the phrase “inheritance tax on pensions” might suggest.
Most estates will still not pay inheritance tax, and several important exemptions remain available.
What is changing in April 2027?
Under the current system, many unused pension funds can generally sit outside a person’s estate for inheritance tax purposes.
That treatment will change for deaths occurring on or after 6 April 2027.
HM Revenue & Customs says most unused pension funds and pension death benefits will be brought into the value of an individual’s estate when calculating inheritance tax. The change was legislated for through the Finance Act 2026, which received Royal Assent in March.
The reform is designed to remove what the government considers an inconsistency in the tax treatment of pensions and other forms of inherited wealth.
The Treasury has argued that pension savings should primarily be used to fund retirement rather than becoming a vehicle for passing wealth to the next generation without inheritance tax.
But for families who have spent decades building retirement savings, the practical consequence can be significant.
If a person dies with a substantial unused pension pot, that money may increase the value of the estate for inheritance tax purposes.
Why is the figure £1.46 billion?
The £1.46 billion figure refers to the estimated annual additional revenue for the Exchequer once the policy is fully established.
The government’s Autumn Budget 2024 costing estimated that the measure would raise approximately £640 million in 2027-28, rising to £1.34 billion in 2028-29 and £1.46 billion in 2029-30.
That does not mean £1.46 billion will suddenly be taken from families in April 2027.
The revenue is expected to build over time.
This distinction is important because headlines describing the reform as a £1.46 billion “grab” can give the impression of an immediate annual charge. The official costing instead shows a phased increase in revenue.
Who will actually be affected?
The government estimates that around 213,000 estates with inheritable pension wealth will exist in 2027-28.
Of those, approximately 10,500 estates are expected to become liable for inheritance tax where they would not previously have been liable.
A further 38,500 estates are expected to pay more inheritance tax than they would have done under the previous rules.
The government estimates that the average inheritance tax liability among estates already paying the tax could increase by around £34,000 when pension assets are included.
These figures are estimates and can change because people’s behaviour may change in response to the reform.
For example, some people may draw down pension savings during their lifetime, spend more of their money or make gifts where permitted under existing inheritance tax rules.
HMRC explicitly acknowledges this uncertainty.
It does not mean every pension will be taxed
One of the most important points for families is that the reform does not mean every pension pot will automatically generate an inheritance tax bill.
Inheritance tax is generally charged only where the taxable estate exceeds the relevant allowances after exemptions and reliefs have been taken into account.
The standard nil-rate band is £325,000.
There is also a residence nil-rate band, subject to eligibility and conditions, which can increase the amount that can potentially pass to direct descendants without inheritance tax.
Transfers between spouses or civil partners can also qualify for the spouse or civil partner exemption.
The government has specifically stressed that most estates will continue to have no inheritance tax liability after the pension changes take effect.
That means the impact will be concentrated among estates with sufficient wealth to fall within the inheritance tax system.
An important difference for married couples
The rules surrounding spouses and civil partners are particularly important.
Where pension assets and other property are passed to a surviving spouse or civil partner, the transfer can generally qualify for the inheritance tax spouse or civil partner exemption.
HMRC’s technical guidance provides an example of a person dying with a £400,000 pension fund and a £1.2 million estate that passes to their civil partner. Under the example, the combined value is brought into the inheritance tax calculation, but the transfer remains exempt because it passes to the civil partner.
This illustrates why the size of the pension alone does not determine whether tax will be payable.
Who receives the money and the overall value and structure of the estate are also important.
Why are pensioners concerned?
The emotional difficulty surrounding the reform comes from the purpose of pension saving.
People are encouraged throughout their working lives to save for retirement. They may contribute for decades, sometimes with employer contributions and tax advantages.
Some retirees then deliberately preserve part of their pension because they want financial security later in life or hope to leave something to their children or grandchildren.
The new rules change the inheritance tax treatment of that unused money.
Recent research reported by the Times suggests that the upcoming change is already influencing financial behaviour among some pensioners. The newspaper reported that some retirees are considering spending more of their pension savings or giving more money to relatives before the new rules take effect.
That creates a difficult balance.
Drawing down pension money earlier may reduce the amount left in an estate, but retirees must also ensure they do not spend so much that they undermine their own financial security.
Financial decisions therefore cannot safely be based on inheritance tax alone.
The government has a different argument
The government’s justification is not simply about raising money.
HMRC says the reform is intended to remove distortions that have encouraged pensions to be used as a tax-planning vehicle for transferring wealth after death.
Under the new system, the distinction between many different types of pension arrangements will be reduced, creating a more consistent inheritance tax treatment.
The government also maintains that pension tax relief remains available to encourage people to save for retirement.
In this view, the pension system should support people during their lives rather than primarily functioning as a mechanism for transferring wealth after death.
Critics take a different view.
They argue that people who have already saved under the previous rules could reasonably feel that the tax treatment of their retirement assets is being changed after years of planning.
The Investment Association has also recently urged the Chancellor not to make further changes to savings, pensions and investment taxation, warning that frequent policy changes can undermine confidence in long-term saving.
What happens when someone dies?
The new system also changes the administrative process.
From April 2027, pension scheme administrators will have responsibilities for reporting unused pension funds and pension death benefits to HMRC and, in relevant circumstances, paying inheritance tax attributable to those assets.
Personal representatives of the estate will need to provide information to pension administrators, while pension administrators will share relevant information about the deceased’s pension arrangements.
HMRC is developing additional guidance and tools ahead of implementation.
This administrative element is important because an estate can involve several pension schemes, property, savings, investments and other assets.
Calculating the final inheritance tax position may therefore become more complicated for some families.
Is the £1.46 billion figure guaranteed?
No.
The £1.46 billion figure is a government costing, not a guaranteed amount of revenue.
HMRC has identified behavioural responses as an area of uncertainty. If people change how they use pensions, make permitted gifts or otherwise restructure their finances, the eventual tax take could differ from the original estimate.
The number of estates affected could therefore also change.
This is one reason why claims that the policy will simply “take £1.46 billion from families” oversimplify what the figure represents.
It is an estimate of additional Exchequer revenue under the government’s assumptions.
Why April 2027 matters
For families with significant pension savings, 6 April 2027 is an important date.
The legislation applies to deaths occurring on or after that date. If a pension scheme member dies before 6 April 2027, the cur