Inheritance tax overhaul: why families must act now to protect wealth

UK households could face sharply increased inheritance tax bills under proposed reforms expected to come into force from 2027.

These changes, which may include pension savings in estate valuations, could leave thousands of families grappling with unexpected costs, averaging £34,000 per estate, warns Andy Wood of international tax consultancy Tax Natives.

Pensions in the tax spotlight

Under current rules, pensions are often shielded from inheritance tax, making them a key vehicle for intergenerational wealth transfer. However, proposed reforms suggest that pension assets will be included in inheritance tax calculations, marking a major departure from the status quo.

Wood explains:

“If pensions are included, thousands of estates will suddenly fall into the inheritance tax net. Many families, previously outside the scope of this tax, could face significant liabilities averaging £34,000 or more.”

The changes could also lead to double taxation:

    • Inheritance tax on the value of pension assets.
    • Income tax on withdrawals by beneficiaries.

This dual burden could dramatically erode the value of pension savings, leaving families with less financial security than intended.

Families with estates over £2 million face sharper losses

For wealthier families, the challenges are compounded. Estates valued over £2 million stand to lose the residence nil rate band, a tax relief designed to protect family homes from excessive tax bills. Without this buffer, inheritance tax liabilities could rise significantly, affecting generational wealth transfer strategies.

Proactive planning is essential

Wood stresses that families must act now to mitigate potential costs:

  • Restructure wealth: Move assets out of pensions where appropriate.
  • Use gifting allowances: Leverage annual and lifetime tax-free gifting options to reduce taxable estates.
  • Seek professional advice: Work with qualified tax advisers to optimise estate planning and safeguard financial legacies.

He adds:

“Understanding these changes and acting early is crucial. There are options available to minimise liabilities, but families need to plan ahead.”

What next?

As the 2027 deadline approaches, professional guidance is more vital than ever. Firms like Tax Natives, which connect clients with regulated tax advisers worldwide, can provide essential support to navigate these complex changes.

The inclusion of pension assets in inheritance tax calculations represents a seismic shift for families relying on pensions as part of their wealth strategy. Early intervention and tailored advice can make all the difference in preserving financial legacies.