How Proposed Tax Reforms May Impact You

From April 6th, 2027, your pension may become subject to inheritance tax (IHT) following changes recently announced by former Chancellor of the Exchequer, Rachel Reeves.

Whether Rachel Reeves' pension tax proposals will go ahead under new Chancellor John Healey remains unconfirmed, and industry leaders are pushing for the changes to be scrapped. However, until this is confirmed, it is worth understanding how the changes could impact you.

What Are The Current Rules?

Under the current regulations (pre-April 2027) the money left in your pension is not usually subject to inheritance tax. However, anyone who inherits the pension (beneficiaries) may have to pay income tax when they withdraw the funds, depending on whether you die before the age of 75 or not.

However, under the new proposed rules, beneficiaries may also have to bear the burden of inheritance tax on monies received from an inherited pension.

As a result, many people are concerned about how the changes might impact the amount of tax they pay when inheriting someone’s assets.

What Is Changing?

Currently (July 2026), your estate for inheritance tax purposes includes assets such as your home, savings and investments. The current tax-free threshold is £325,000, and anything above this may be subject to inheritance tax at 40%, depending on your circumstances.

For years, leaving unused pension funds to your beneficiaries has been seen as a tax-efficient means of passing on money to your family; unlike savings or investments, unused pensions were not liable for inheritance tax.

From April 2027, most unused pension funds will be added to your estate, and if the value exceeds your tax-free allowance, there will be a 40% charge on your pension.

This has led to the new regulations being dubbed by some as the “double tax”, as some beneficiaries will be left bearing the burden of both income tax and inheritance tax on pension pots.

How Could This Effect People in Wales?

The new rules will apply across the UK, including Wales.

This means some Welsh families who previously would not have expected to pay inheritance tax may find that their estate is now above the £325,000 threshold, particularly if they own a home and have built up a significant pension.

The impact will, however, depend on the value of your home, savings, investments and pension, as well as any available allowances and exemptions. It will also mean that there is less tax-free allowance available for your free estate (home, savings and investments) as this will be shared with your pension pot.

Would This Affect You?

These changes are most likely to affect you if:

• Have an unused defined contribution pension (such as a personal pension or SIPP).
• Have an estate (including unused pension funds when you pass away) worth more than the available inheritance tax allowances (for many people this starts at £325,000, although it can be higher depending on your circumstances, such as if you're leaving your home to direct descendants).
• Are planning to leave your pension to children, grandchildren or other beneficiaries, rather than a spouse or civil partner.
• The person providing the inheritance (testator) passes away on or after 6 April 2027, when the new rules come into effect.

How Much Tax Could Be Paid?

Income tax is already payable when beneficiaries withdraw money from a pension inherited from someone who died aged 75 or over. Under the proposed changes from April 2027, unused pension funds may also become subject to inheritance tax. In some cases, this could result in an effective tax rate of up to 67%.

For example, if a pension pot worth £100,000 is subject to 40% inheritance tax, £40,000 would be paid in IHT, leaving £60,000. If the beneficiary is an additional-rate taxpayer and pays 45% income tax when withdrawing the remaining pension, they would pay a further £27,000 in income tax. In total, £67,000 would be paid in tax, leaving the beneficiary with £33,000.

As outlined, the tax burden has potential to be high. Therefore, it is important that you take steps now to consider your estate, and the possible tax bill when you pass away.  It will be important to ensure that your estate is set up in a way to minimise the burden of tax for your beneficiaries, both in respect to your estate and also your pension.

How We Can Help

At JCP Solicitors our friendly and knowledgeable team can provide tailored advice on inheritance and estate planning.

Whether you are reviewing an existing estate plan or planning for the future, we are here to provide clear, practical advice that reflects your individual circumstances.

For expert legal advice and guidance, JCP can help. Contact Beverley Bowen on beverley.bowen@jcpsolicitors.co.uk 01792 525458.