Reeves’s Inheritance Tax Shake-Up
A Costly Hidden Burden on Many
Overview: The April 2027 Pension Bombshell
Chancellor Rachel Reeves has announced a seismic change to the UK’s inheritance tax (IHT) regime: from April 2027, pension pots will no longer be exempt from death duties. Previously enjoyed as a tax-efficient legacy for beneficiaries, unused private pension funds will now form part of the deceased’s estate and may incur inheritance tax at up to 40 per cent—significantly raising costs for many working-age homeowners.
New analysis estimates that a typical working-age single homeowner in England—owning an average-priced property and holding a “moderate” pension fund—could face an inheritance tax liability of approximately £82,158 under the new rules (The Scottish Sun, MoneyWeek). That is, on median figures, the Chancellor’s pension raid equates to a staggering five-figure tax in what many assumed were safe retirement assets.
Scaled Impact: How Inheritance Tax Exposure Could Nearly Double
Today, only a small proportion of estates are subject to inheritance tax. In 2022–23, just 4.62 per cent of UK deaths resulted in IHT liabilities—equivalent to around 31,500 estates (MoneyWeek). However, with the inclusion of pension wealth from 2027, that figure is projected to almost double—to approximately 9.5 per cent by the end of the decade (MoneyWeek).
Similarly, current analysis suggests an additional 10,500 estates will pay inheritance tax for the first time, and another 38,500 estates will face higher tax bills thanks to these changes (Financial Times). The government forecasts this measure could raise roughly £1.5 billion per year by 2029–30 (The Scottish Sun, Financial Times, MoneyWeek).
Who Pays What? The Anatomy of the £82,000 Average
To understand how the headline figure is reached:
- Average home value in England is estimated at around £290,395.
- A “moderate” pension pot is around £415,000.
- The inheritance tax nil-rate band stands at £325,000; and an additional £175,000 is available if the main residence is left to direct descendants—raising the total tax-free threshold to £500,000.
Nonetheless, combining the property and pension assets of our hypothetical individual results in an estate exceeding the allowances, bringing the inheritance tax liability to about £82,158 (The Scottish Sun).
In London, where property prices are considerably higher—for instance, an average home worth £565,637—paired with the same pension estimate, the resulting IHT bill balloons to around £192,254, even after allowances (The Scottish Sun).
In alternative calculations by Quilter, a single parent in England owning a home worth £308,782, together with a pension of £459,000, could be hit with an inheritance tax bill of more than £107,113 under the new rules (media.quilter.com). That figure jumps to near £194,000 for an equivalent London estate (media.quilter.com).
Why the Shock? Frozen Thresholds, Rising Assets, Pension Inclusion
Three interlocking factors magnify the impact:
- Frozen Tax Bands
The nil-rate band and the residence nil-rate band have been frozen—kept at £325,000 and £175,000 respectively—at least until 2030 (Royal London, MoneyWeek, The Guardian).
Meanwhile, property values and pension savings—particularly among retirees—continue to climb. As a result, more estates stand to exceed the tax thresholds. - Inclusion of Pensions
Pensions were previously outside the estate for inheritance purposes, especially drawdown-style defined contribution pots passed on tax-free. From April 2027, they will be fully brought into the estate for IHT purposes, significantly increasing taxable value (Royal London, Financial Times, The Times). - Fiscal Drag
As asset values (houses, pensions) rise with inflation while thresholds remain stagnant, more estates are swept into taxation—even among those of modest means—due to this “fiscal drag” effect (The Times, MoneyWeek).
Grave Inequities: Cohabitants and Early Deaths
Unmarried Couples Left Exposed
Critics warn that cohabiting couples will suffer disproportionately. Unlike married spouses or civil partners, they’re ineligible for spousal exemptions or the transferability of unused tax allowances. Whereas a married couple can pass combined allowances (up to £1 million free of tax in many cases), cohabitants lack this safeguard—exposing them to heavy tax burdens on death (Royal London, The Scottish Sun, The Guardian).
Jon Greer of Quilter calls this situation “optically terrible” and “unjust”, particularly when working-age individuals die before accessing their pensions, leaving grieving families financially destabilised (The Scottish Sun).
Deaths Before Pension Access
The Treasury has confirmed that the new IHT will apply even if the pension holder dies before reaching the minimum pension access age—currently 55, rising to 57 in 2028 (MoneyWeek, The Sun).
This is seen by many as deeply unfair: individuals passing away before they can touch their pensions will still see those funds taxed at up to 40 per cent, despite having no benefit from the wealth (MoneyWeek).
Unintended Consequences: Rash Financial Moves to Avoid IHT
Media coverage and financial commentary reveal a wave of early pension withdrawals and lavish spending as wealth managers and older savers scramble to avoid the tax hammer.
One example: wealthy retirees booking extravagant multigenerational holidays—some reportedly withdrawing tens of thousands to spend now, rather than leave pensions for later generations (The Guardian).
Others fear a ‘double tax’: under-75 deaths still pass pensions tax-free, but over-75 deaths trigger both inheritance tax and income tax on withdrawal for beneficiaries—effectively reducing what heirs receive (Evelyn Partners).
Some advisers recommend careful transition strategies—using annuities, structured drawdowns, or gift planning—to manage estate value before the rules take effect (Financial Times, The Times).
Broader Political and Fiscal Context
These reforms are part of Labour Chancellor Reeves’s broader strategy to plug a mounting UK deficit without raising income, VAT, or National Insurance. Instead, attention has focused on capital-based taxes like IHT, capital gains tax, and reforms to gift rules (The Guardian, MoneyWeek).
Some commentators, including former Treasury advisers, note that while IHT reform is sensible—given its avoidance by wealthy individuals—it may still fall well short of filling a fiscal black hole estimated at £50 billion-plus (The Independent, The Guardian, MoneyWeek).
Jonathan Portes argues that such measures will not generate the tens of billions needed, while others warn the reforms risk eroding pensions as a retirement incentive and aggravating inter-generational fairness concerns (The Independent, The Guardian, MoneyWeek).
What You Can Do Now: Planning Ahead to Mitigate Impact
1. Estate Planning Now, Not Later
Begin early to assess whether drawing down pension funds, making lifetime gifts, or using trusts could reduce exposure. Expert advice is vital before irreversible actions are taken (The Times, Financial Times, Royal London, First Wealth).
2. Consider Marriage or Civil Partnership
For cohabitees, getting married or entering a civil partnership can unlock significant tax advantages—transferrable allowances and spousal exemptions—that dramatically reduce IHT exposure (Royal London, Financial Times).
3. Make Lifetime Gifts Wisely
While still alive, taking advantage of existing allowances—such as the £3,000 annual gift exemption, or larger gifts eligible under the seven-year taper rule—can help shrink the estate (The Times, Royal London).
4. Use Life Insurance in Trust
Setting up a life insurance policy written into trust can provide liquidity to pay potential IHT, sparing assets from forced sale in probate and easing estate management (MaPS).
5. Monitor Legislation Closely
Keep abreast of evolving details—especially around whether new caps on lifetime gifts or changes to taper relief will emerge—and delay major planning decisions until the precise legislation is in place (The Times, Financial Times).
Summary: A Seismic Shift in Inheritance Tax
- From April 2027, unused pension funds will be included in estates and subject to inheritance tax.
- A typical working-age homeowner with average assets could face a bill of £82,000. Londoners’ liabilities could stretch into the £190,000s. Some Quilter projections show liabilities over £107,000 or even £194,000 (The Scottish Sun, media.quilter.com).
- The proportion of estates facing IHT may double—from 4.6 per cent to 9–10 per cent by 2030—bringing tens of thousands more estates into the tax net (MoneyWeek, Financial Times).
- The combination of rising asset values, frozen tax bands, and pension inclusion—especially impacting unmarried couples and early deaths—is driving calls for thoughtful transitional relief and careful planning.
- Actions like accelerated withdrawals, gifting, and marriage are already being taken to reduce anticipated exposure, though risks remain until legislation is ironed out.
- For many families, especially middle-income savers, this new policy could cause significant financial distress just when they cannot afford it—amid grief, estate settlement, and uncertainty about future tax direction.