After changes to inheritance taxes, will your family suffer a triple tax blow?

From April 2027 and beyond, unused pensions will be subject to inheritance tax, which may leave some families with sizable tax obligations

When inheritance tax changes take effect next year, families may face a triple tax blow, but there are ways to mitigate the impact.

In April 2027, inheritance tax (IHT) will apply to the majority of unused pensions. This could result in income tax bills, IHT, and the loss of the residence nil-rate band allowance for some families.

What could happen to families?

Estates under £325,000 are exempt from IHT due to a benefit known as the nil-rate band.

If you are leaving your house to a direct descendant, like a child or grandchild, you may also be eligible for an additional 175,000 allowance known as the residence nil-rate band.

Watch the entire video here: Certain estates up to £1 million have no IHT liability because any unused funds from these two allowances can be transferred to a spouse or civil partner.

Nonetheless, the residence nil-rate band is reduced by one for every two estates valued at more than £2 million.

Once your estate is valued at £2.35 million or more, if you are single, you lose your entire residence nil-rate band; if you are in a relationship, you lose everything if the estate is valued at £2.7 million or more.

More people may lose their residence nil-rate bands as a result of the inclusion of the majority of unused pensions within estates for IHT purposes starting in April 2027.

If the deceased was 75 years of age or older at the time of death, beneficiaries are also required to pay income tax on any unused pension funds.

This implies that starting in April 2027, certain estates will be subject to a triple tax burden when IHT and pension income tax are combined with the removal of the residence nil-rate band.

Some estates may have an effective 91 percent tax charge on inherited unused pensions, according to calculations made by insurance company NFU Mutual.

"The possibility of some families facing an effective tax rate of over 90 percent on inherited pension wealth highlights just how significant the inheritance tax changes coming in from April 2027 will be," stated Adam Cole, retirement specialist at wealth management company Quilter.

Even though these are fairly extreme situations, many more families will discover that pensions that were previously exempt from inheritance taxes are now adding significantly to their tax obligations."

Source: NFU Mutual; swipe to scroll horizontally.

How to lessen the effects of a possible triple taxation.

Giving a gift.

One of the easiest ways to reduce the value of your estate and a potential IHT bill is to make gifts during your lifetime.

There are different allowances for gifts. For instance, you can donate up to £3,000 tax-free to one or more individuals each fiscal year. This is referred to as the annual exemption.

Giving gifts to others on a regular basis is also acceptable as long as they don't lower your standard of living and are funded by income rather than capital.

This is referred to as expenditure out of income and can include funding a child's savings account or paying rent on a regular basis.

In addition to other inheritance tax benefits, gifts made at least seven years prior to death are exempt from inheritance tax unless they are part of a trust.

"One of the best ways to lower inheritance tax is to make gifts during your lifetime," stated Sean McCann, a chartered financial planner at NFU Mutual.

"Most gifts require you to live for seven years, but some are immediately exempt, such as gifts up to £3,000 per tax year and regular gifts from income that don't affect your normal standard of living.

"To cover any potential inheritance tax liability on the gift, it is often possible to obtain a life insurance policy in trust."

Get your 25% tax-free lump sum sooner.

Up to a maximum of 268,275, you may take out up to 25% of your pension funds in one lump sum starting at age 55 and starting in April 2028 at age 57.

Reducing your capital and the size of your estate is the benefit of doing this earlier.

Nevertheless, there are disadvantages to taking the lump sum early, such as your pot getting smaller and having less room for growth.

An annuity is one example.

An additional way to reduce the value of your estate is to purchase an annuity.

An annuity is an insurance product that gives you a lump sum of money in exchange for regular payments for a predetermined amount of time.

Purchasing one may reduce your loved ones' future IHT bill and take money out of your estate.

Annuities are now a more alluring option due to their rising rates in recent years. The Financial Conduct Authority reports that annuity sales increased from 82,061 in 2023-2024 to 88,430 in 2024-2025, a 7.8% increase.

"We would not advocate annuity purchases simply to avoid future inheritance tax, but the relative merits of annuity vs. drawdown have slightly changed," stated Ed Wood, director of financial planning at wealth manager Rathbones. It might be worth a second look for those who had previously ruled this out."