The 2027 Pension Rule Change Every UK Pension Holder Needs to Know About, Including Non-Residents

From 6th April 2027, unused pension funds in the UK will be brought inside an estate for inheritance tax (IHT) purposes. Under the current rules, most defined contribution pots sit outside the estate when HMRC works out whether IHT is due. This is a reason that pensions have become such a popular way to pass on wealth tax-free, on top of their everyday role of funding retirement.

From 2027, that protection disappears for the vast majority of schemes. Pensions will get added to everything else - property, savings, and investments - when working out whether an estate crosses the IHT threshold. Once it does, anything above that threshold is taxed at 40%.

And this isn’t just a problem for the super-rich. A paid-off home, a pension built up over a working life, and a handful of investment accounts can add up to that faster than most people expect, especially once a spouse's assets are added in. 

You don’t need to have exceptional wealth to be affected by this change. It will pull a large number of previously unaffected estates into the IHT net for the first time, simply because pensions now count toward the total.

Picture a couple with a £1 million home and a £1 million pension. Under today's rules, the pension is ignored for IHT purposes. Between the £325,000 Nil Rate Band, the £175,000 Residence Nil Rate Band, and the ability to transfer unused allowances between spouses, the couple can pass up to £1 million tax-free. HMRC takes nothing.

From 2027, the pension counts. The estate is now £2 million rather than £1 million. After the same combined £1 million allowance, £1 million remains taxable. At 40%, that's £400,000 owed to HMRC on an identical estate.

There's a quieter risk sitting behind the headline figure: the taper on the Residence Nil Rate Band. That extra £175,000 allowance for passing on a family home starts shrinking once the total estate exceeds £2 million, falling by £1 for every £2 over that line.

Today, a £1.2 million home plus a £900,000 pension adds up to £2.1 million on paper, but because the pension doesn't count, the estate sits comfortably under the £2 million trigger and the allowance survives intact. After 2027, that same estate will be valued at £2.1 million. The taper kicks in, and part of the Residence Nil Rate Band is lost, on top of the IHT now due on the pension itself. 

The Nil Rate Band and Residence Nil Rate Band have been frozen for a number of years, and this, combined with rising house prices and business valuations, is pushing more families into the taper zone. 

Anyone whose property and pension together approach £2 million should treat this as a planning priority rather than a footnote.

With the 2027 deadline looming, early planning is essential. The following options can help mitigate the impact of the new IHT rules, though they depend heavily on individual circumstances.

Living abroad does not provide protection from this pension rule change. While someone who has lived outside the UK for over 10 years may see their worldwide assets fall outside the scope of UK IHT, pensions held in UK-based schemes remain liable to UK IHT under the new rules, regardless of how long someone has lived abroad. 

This means the mitigation strategies outlined above are just as relevant for expats as they are for UK residents, albeit with another jurisdiction’s tax rules to take into account. In some cases, transferring a UK pension overseas may be worth exploring, though this is a significant and largely irreversible decision that should only be made with professional, cross-border advice.

This change marks the end of treating pensions as a separate, sheltered category of wealth. This is not a small technical adjustment. It changes the role pensions have played in long-term planning for UK residents and expats alike, and structures that have reliably reduced exposure for years may no longer deliver the same outcome. For some families, this could mean a tax liability where none previously existed.

Going forward, pensions need to be planned alongside property and investments as part of one estate, not as a pot that quietly sits outside the calculation. If a pension and property together are approaching the £2 million mark, now is the time to review the position.

Without a plan, an estate may end up exposed to the full 40% charge on whatever sits above the available allowances.

If you're based in the UK, our knowledgeable team can help you revisit any plan built around the assumption that a pension would always sit outside your estate. If you're based abroad, that review should also cover whether a pension transfer makes sense for your circumstances.

Whatever your situation, if you believe you will be affected by this major change, a conversation with one of our qualified advisers should be a priority. Get in touch if you'd like to book a free consultation.