John Healey’s cruel £1.46bn inheritance tax grab begins in April – it’s causing panic
Chancellor John Healey (Image: Getty)
The inheritance tax changes due to take effect next year are becoming an increasingly important issue for families approaching retirement, particularly those who have deliberately kept money inside pensions rather than spending it during their lifetime.
The key date is 6 April 2027, when most unused pension funds and certain pension death benefits will be brought into the value of an estate for inheritance tax purposes. The policy was originally announced at the Autumn Budget 2024 and has since been legislated for through the Finance Act 2026.
That means the change is no longer simply a proposal that families can assume might disappear. It is now part of the tax framework that will apply to deaths occurring from April 2027.
The Treasury’s own figures show the potential scale. The measure was originally forecast to raise £640 million in 2027-28, rising to £1.46 billion a year by 2029-30.
However, the £1.46 billion figure should not be interpreted as a bill that every pensioner will face. The new rules only increase inheritance tax where an estate falls within the relevant tax rules. The Government estimates that, in 2027-28, around 213,000 estates will contain inheritable pension wealth. Of these, approximately 10,500 estates are expected to become liable for inheritance tax where they otherwise would not have been, while around 38,500 estates are expected to pay more tax than under the existing system.
For families, that distinction is crucial.
Why pension savings are being brought into inheritance tax
Under the existing system, many pension schemes have allowed unused pension funds to pass to beneficiaries without being included in the deceased person’s estate for inheritance tax.
That has made pensions an important part of long-term estate planning. Someone could potentially use other assets to fund retirement while leaving pension wealth untouched, allowing it to pass to children or other beneficiaries.
The Government argues that this created an incentive for pensions to be used as a vehicle for passing wealth between generations rather than primarily for retirement income.
HM Revenue & Customs says the reform is intended to remove what it describes as distortions in the tax system and create a more consistent treatment of inherited wealth.
From April 2027, most unused pension funds and pension death benefits will instead be included when calculating the value of the deceased person’s estate for inheritance tax.
There are important exceptions. Registered pension-scheme death-in-service benefits will remain outside inheritance tax, while certain dependant’s scheme pensions and other specified benefits are also excluded. Funds below £1,000 and continuing annuities are among the other exclusions set out by HMRC.
The £1.46bn figure hides a more complicated picture
The political argument over the policy is likely to intensify as April 2027 approaches.
Critics have described the measure as another tax burden on older households and argue that people who have spent decades saving for retirement could see a larger share of their accumulated wealth eventually transferred to the Treasury.
The Government’s position is different. Ministers have presented the reform as part of a broader attempt to make the inheritance tax system more consistent and reduce opportunities for pensions to be used primarily for intergenerational wealth transfer.
There is also an important technical point that families need to understand.
Inheritance tax is not automatically charged simply because somebody has a pension.
The standard inheritance tax nil-rate band remains £325,000, while the residence nil-rate band is £175,000 for qualifying estates where a home is passed to direct descendants, subject to the existing conditions and taper rules. These thresholds are currently legislated to remain fixed through the 2030-31 tax year.
For a qualifying married couple or civil partners, unused allowances can potentially be transferred between spouses or civil partners, meaning the combined allowances can be substantially higher in the appropriate circumstances.
The pension therefore becomes another component of the estate rather than an automatic 40 per cent deduction from every pension pot.
Why retirees are changing their plans
The prospect of the reform has nevertheless prompted advisers to revisit the way pension wealth is used.
Financial advisers have warned that some people may change when they take money from their pension, how much they spend during retirement and whether they make gifts to relatives while they are still alive.
Quilter has said the upcoming reforms are already reshaping retirement planning, with advisers reporting uncertainty over how people should balance their own financial security against their desire to leave money to family members.
That creates a difficult calculation.
A retiree may want to preserve as much money as possible for children or grandchildren. But spending or gifting too aggressively in order to reduce the eventual estate could leave the retiree with less money to meet future living costs, care expenses or unexpected bills.
This is particularly significant because pension savings are designed to provide income throughout retirement. The possibility of inheritance tax should therefore not automatically mean that people should withdraw money earlier.
Indeed, HMRC’s own estimates acknowledge that behavioural changes could reduce the number of estates ultimately affected by the reform. Its published figures are described as static estimates that do not fully account for people changing their pension or estate-planning behaviour.
Families face a new layer of administration
Another concern is not simply the amount of tax but how the system will operate after someone dies.
From April 2027, personal representatives of an estate will generally be responsible for reporting and paying inheritance tax due on unused pension funds and relevant death benefits.
HMRC has introduced mechanisms intended to make this possible. In circumstances where inheritance tax is expected to be due, personal representatives can direct pension administrators to withhold part of the benefits and pay the tax to HMRC before releasing the remaining money to beneficiaries.
The Government has also published further technical guidance on how pension values will be identified, shared with personal representatives and incorporated into inheritance tax calculations. A further HMRC technical note was published as recently as August 2026.
This matters because pension assets have traditionally been administered separately from many other parts of an estate.
Families dealing with a death will therefore have to establish what pension arrangements existed, determine the value of unused benefits and establish whether those benefits contribute to an inheritance tax liability.
Why the policy is causing concern before it starts
The controversy is ultimately about more than a single tax figure.
For many households, a pension represents decades of contributions, often including money paid by employers as well as the employee. The prospect of that pension becoming part of the inheritance tax calculation changes one of the assumptions on which some retirement plans were built.
That does not mean every family will face an inheritance tax bill.
But for estates that already sit close to the relevant thresholds, the addition of a sizeable unused pension pot could materially alter the calculation. HMRC estimates that, where pension assets are included, the average inheritance tax liability among affected estates could rise by about £34,000.
That figure helps explain why financial advisers are urging households to understand the rules before making major decisions.
At the same time, the policy presents a difficult balancing act for the Government. Bringing more wealth into the inheritance tax system provides additional revenue, with the Treasury expecting receipts to rise to £1.46 billion annually by 2029-30. But the reform also changes the incentives surrounding retirement saving and intergenerational transfers.
With the April 2027 implementation date approaching, pensioners and their families have time to review their circumstances, but the issue is becoming increasingly difficult to ignore.
The central question for households is no longer simply how much they have saved.
It is how those savings will be treated if they remain untouched when the pension holder dies — and how much of that wealth will ultimately reach the next generation.