Family Business? How New Pension Tax Rules Could Affect Your Long-Term Plans

In last year’s autumn budget, Chancellor Rachel Reeves announced pension reforms that will see unused pensions become subject to inheritance tax from 6 April 2027. The changes include limiting inheritance tax reliefs for farmland and business assets to £1 million, beyond which an IHT rate of 20% applies.

While the changes are expected to boost economic growth and raise £1bn annually by 2030, they are supported by just 21% of those surveyed.

These changes won’t affect everyone, however, if your business depends on using pensions strategically for wealth-transfer, this may be a good time to reassess your financial strategy.

New Pension Tax Rules: What You Need to Know

Previously, unused defined contribution (DC) pensions were exempt from IHT. However, from 6 April 2027, any unused pension funds will be considered part of the deceased’s estate, and therefore become liable to IHT.

This will see beneficiaries facing a double tax on wealth transferred to them, having to pay both inheritance tax and income tax. To avoid penalties of up to £3,200, families must act quickly with executors to locate pension schemes, assess their value, and ensure inheritance tax is paid by the six-month deadline.

Spousal exceptions will continue to apply, so pensions left to a spouse or civil partner are exempt from IHT.

What You Can Do Now

There are plans to make this process as straightforward as possible. Former pension minister Steve Webb says: “HMRC has promised various online tools and calculators, so you won’t actually have to work things out for yourself, you will simply have to enter the relevant information and they will then apply the rules and work out what is due (if anything) and from whom.”

Webb advises that you keep your paperwork, including pensions scheme policy numbers, and consider preparing a document for executors and heirs, with useful information to ease the admin burden.

If you’re seeking to lower a future IHT bill, you might consider setting up a Family Investment Company (FIC), which allows shares to be gifted through families. As long as the donor survives for at least 7 years, the gifted shares are removed from their estate, and therefore exempt from IHT. Unlike other trusts, FICs have no cap on how much can be gifted, however they can be complex and costly to run, so proper advice is needed.

You might also look at whole-of-life insurance policies which can help cover any future inheritance tax bills by providing your family with a tax-free lump sum. This can be particularly helpful when most of your wealth is locked in property or business assets, making it harder for your heirs to access cash quickly.

Now is also a good time to review who you’ve nominated to receive your pension. Leaving it to a spouse or civil partner won’t trigger inheritance tax, but naming children or other beneficiaries ahead of the 2027 rule change could prove more tax-efficient.

How Warr & Co Can Support You

We offer pension and tax planning services and our advisors specialise in helping family businesses and individuals make informed, strategic financial decisions. Whether you’re considering restructuring your assets, or just need general advice and support, our team is here to help you make the most of what you’ve built – and to ensure it’s passed on as smoothly and tax-efficiently as possible.

With the 2027 deadline fast approaching, proactive planning today can mean significant savings for your loved ones tomorrow. Get in touch to schedule a consultation and take the next step in securing your family’s financial future.