Confirmed: pensions to incur IHT – what might it mean for investors?

For decades, pensions have been among the most attractive, tax-efficient places you could invest your wealth and were widely used as a way to reduce inheritance tax (IHT) liabilities.

But the shine has come off somewhat, particularly after the latest set of changes.

From 6 April 2027, your unused pensions will form part of your estate. So, for the first time, they could be subject to inheritance tax of up to 40%. This was first announced in the Autumn 2024 Budget. Then, on 21 July 2025, the government published a policy paper and draft legislation, confirming the measures.

The Treasury anticipates this will add around £1.5 billion to IHT receipts by 2029/30, bringing the total to £14.3 billion, nearly double what it is today.

An extra 10,500 estates are expected to face an IHT liability, while for 38,500 estates the value of bequeathed pension pots will bump up the IHT bill by an extra £34,000 on average.

The new rules could also mean a double-whammy of tax: some beneficiaries could face both income tax and IHT on the same pension fund, potentially resulting in an effective tax rate of up to 67% (see below).

With pensions increasingly less attractive, how could experienced investors mitigate the impact of IHT?

Under current rules, pensions can be passed on very tax efficiently.

Broadly speaking, if you die before age 75, your remaining pension pot can usually be passed on completely tax-free. If you die after age 75, your beneficiaries may be subject to income tax on any income they take, but there is no IHT to pay.

The new rules, effective from 6 April 2027, will bring most unused pension funds and death benefits within the value of your estate for IHT purposes. As a result, more estates are expected to be caught by IHT and/or face an increased IHT liability.

Some exemptions will apply – for instance, death-in-service benefits from registered pension schemes, and lump-sum death benefits left to a surviving spouse, civil partner or registered charity.

In addition, if you die after your 75th birthday, your beneficiaries' withdrawals from the pension could be subject to income tax at their marginal rate. When you take both income and inheritance tax into account, your loved ones could find themselves paying an effective tax rate of 67%. 

For those prepared to take greater investment risk, one way to shelter your wealth from IHT is to invest in unquoted IHT portfolios.

These invest in private companies that should be able to qualify for Business Property Relief (BPR) – and thereby IHT relief.

Please note, these investments are high risk and illiquid: you should ensure you fully understand the risks and not invest money you cannot afford to lose.

What is BPR?

In brief, BPR is a long-established tax relief originally set up for family businesses, but which could now also benefit investors in qualifying trading businesses.

Your investment should benefit from IHT relief after two years – provided the business remains BPR-qualifying and you still hold the shares (or a BPR-qualifying replacement) on death. Tax rules can change and benefits depend on circumstances.

Up to £1 million of BPR-qualifying assets (including private companies and agricultural property) can be passed on IHT free. The excess will still benefit from 50% IHT relief, meaning IHT will be applied at 20% rather than 40%.

How does the investment work?

IHT portfolios let you retain control of your wealth whilst shielding it from inheritance tax.

Technically, you invest in one or more companies – usually run by a specialist investment manager – that in turn own and operate several companies or projects.

The managers typically aim to give investors exposure to assets they believe can deliver some growth above inflation, with low volatility – not guaranteed.

After two years, the investment should qualify for IHT relief (compared to seven years with other avenues of estate planning).

If you need access to your money, you should be able to request a withdrawal, which will be processed subject to liquidity. Bear in mind, any money you withdraw will no longer benefit from IHT relief and any capital gain might create a tax liability.

EIS and SEIS investments should also qualify for IHT relief after two years, if you still hold them on death and they remain qualifying.

This is part of the generous tax package EIS and SEIS offer to temper the higher risks of investing in small young businesses – including up to 50% income tax and capital gains tax reliefs (SEIS) and up to 30% income tax relief and CGT deferral (EIS).

EIS and SEIS should not be used exclusively as an IHT planning tool - they are high-risk investments designed to target capital growth over preservation (not guaranteed). There also must be an exit for you to realise a return, meaning you cannot make a withdrawal if you require access to your investment.