What the 2027 Inheritance Tax changes mean for your pension

If you’re self-employed and save into a pension, some significant changes are coming from April 2027 that could affect how your pension is treated for tax purposes when you die.

As announced in the last Budget, the government plans to make most unused pension funds subject to Inheritance Tax (IHT). That includes any commercial property or other assets you hold inside your pension pot.

Although this upcoming change hasn’t had a great deal of mainstream press coverage, aside from after the last Budget, it could have a big impact, especially on those planning to use pensions to pass on wealth to their families or to invest in their businesses.

What’s changing in April 2027?

At the moment, most pensions sit outside your estate for inheritance tax purposes. That means that if you die before the age of 75, your remaining pension pot can often be passed on tax-free.

After the age of 75, your beneficiaries may be subject to income tax, but not inheritance tax.

Under the new rules from April 2027, the government plans to:

• Include unused pension funds in your estate for inheritance tax (IHT)
• Make the pension provider or scheme administrator responsible for working out the tax due
• Require the tax to be paid within 60 days of death, before money can be released to your beneficiaries

This could create real problems if your pension includes illiquid assets like commercial property, private company shares, or loans to your business.

Why self-employed people should pay attention

If you’ve built up a pension pot through your company or as a sole trader, you might be using it to invest in:

• Your business premises (via a SIPP or SSAS)
• Stocks, funds, or cash savings
• Loan-back schemes or other business investments

These are legitimate strategies, but under the new IHT rules, your beneficiaries could be forced to sell those assets quickly to pay the tax bill – even if they want to keep the business running or hold the investment long-term.

One estimate suggests that up to 15,000 small businesses could be affected if the owner dies unexpectedly and the pension can’t be accessed in time.

How much tax are we talking about?

Inheritance tax is currently 40% on the value of estates worth more than £325,000 (plus any unused spouse allowances).

If the value of your pension is included as part of your estate, it could push you over the threshold, and the extra tax could be substantial.

And it’s on top of any income tax your heirs might pay when they draw from the pension.

Can you avoid the pension death tax?

This isn’t a tax loophole – it’s a change in how pensions are treated on death. But there are some sensible steps you can take:

• Keep some liquidity in your pension – cash or easily sellable funds to cover any tax due
• Review your nominations and will – assets left to a spouse are still exempt from IHT
• Consider drawing down more during your lifetime if you’re over 55
• Seek advice if you hold property or loans in your SIPP – you may need a backup plan

The key is to plan early. After 2027, these rules will apply automatically, and your pension provider will be responsible for paying the tax – not your family. However, that won’t prevent delays or forced sales if the funds aren’t available.

Checklist – what to do before April 2027

☐ Review your current pension setup – especially if you use a SIPP or SSAS

☐ Make sure your estate is below the IHT threshold, or you’ve used up all available allowances

☐ Talk to a financial adviser about your exposure to IHT and possible mitigation

☐ Check your pension death benefit nominations are up to date

☐ Consider if you want to draw more income before 2027 to reduce your pension pot

☐ If your pension holds business assets, ask your provider how tax would be paid if you died

☐ Discuss with family or executors so they understand what’s involved

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Further reading

• GOV.UK: Technical consultation on pensions and IHT (April 2027)
• Royal London: Pension IHT changes explained
• FT: What the new rules mean for retirement planning
• First Wealth: Practical impact of pension IHT reform

As ever, the devil will be in the detail. But if you’re self-employed and planning to pass on your pension, these changes are worth acting on well in advance of April 2027.