A married couple in their late 70s, with a family home worth around £900,000 and pension savings above £1 million, is the household most directly affected by the 2027 pension inheritance tax changes. For families that fit that profile, the new rules can reduce what reaches the children by more than £400,000. What can those families be doing in the meantime to mitigate the impact of next year’s changes?
In Brighton & Hove, the average detached house sells for more than £900,000. Add a couple of reasonably large pensions, accumulated over 30 or 40 years of work, and you have a family with substantial assets but not unusual ones. Until now, that combination produced a modest inheritance tax bill. From 6 April 2027, it can produce one approaching £700,000.
A Standard Life survey published in March 2026 found that 89 per cent of UK adults have little or no awareness of this change. The change itself is now a year away. For the household most directly exposed by it, that is not much time.
Thinking about the new rules now is a bit like insuring a house against fire. The cost of thinking it through now is small. The cost of discovering too late that hundreds of thousands of pounds have gone to tax can be enormous.
Steven Williams, at rockwealth Brighton, sees the pattern most days. ‘Most of the new clients we see haven’t thought it through,’ he says. ‘They’ve heard something is changing, but the practical implications haven’t landed. That’s not unusual. It’s a complex change to a system most families only think about when they have to.’
The average detached home in Brighton & Hove now sells for over £900,000, putting many local families squarely in the zone where the new pension inheritance tax rules bite hardest
What actually changes in April 2027
From 6 April 2027, most unused pension funds and pension death benefits will be counted as part of the deceased’s estate for inheritance tax purposes. Pensions still pass to beneficiaries through scheme rules and nominations as before; what’s changing is the IHT valuation. That single sentence captures the whole mechanism, and it reverses a decade of received planning wisdom. Some operational detail is still being filled in by secondary legislation and HMRC guidance ahead of April 2027, but the core rule is now law.
The 2015 pension freedoms expanded what people could do with their defined contribution pots and, in passing, turned pensions into a useful vehicle for passing wealth on. Funds left untouched on death sat outside the estate. From April 2027, that advantage closes.
Three things stay the same. Pensions passing to a spouse or civil partner remain free of inheritance tax, as they always have. Charity bequests are unchanged. HMRC has also confirmed that death-in-service benefits from registered pension schemes, dependants’ scheme pensions from defined benefit and collective money purchase arrangements, and unused funds under £1,000 stay outside scope.
What changes is the treatment of most defined contribution wealth: SIPPs, personal pensions, workplace DC pensions and even discretionary schemes that previously sat outside the estate. HMRC uses the phrase ‘notional pension property’ to describe what is brought in, regardless of whether scheme trustees have discretion over who gets the money.
HMRC’s impact assessment sets out the scale. In 2027–28, the first full year of the new regime, 10,500 estates that would not previously have paid inheritance tax will be drawn into the net. A further 38,500 will pay more than they would have done. The average increase across affected estates is around £34,000, though that figure conceals enormous variation by household size and asset mix.
But the impact will not fall evenly. Households with substantial pensions and high-value homes are likely to see the biggest jump in exposure.
The sharpest effects are likely to be felt by asset-rich households in areas where property values have risen strongly over time, particularly in the South East. Steven puts it this way: ‘In Brighton and the rest of Sussex, you have a particular combination: long-term homeowners whose property has appreciated significantly, plus reasonable pension provision. That combination is exactly the sort of household profile the residence nil-rate band taper affects most heavily.The window for thoughtful planning is now. From 2027, more of those families will find themselves in the affected group than they realise.’
‘In 2027–28, the first full year of the new regime, 10,500 estates that would not previously have paid inheritance tax will be drawn into the net.’
What this looks like for a family with £2.4 million in assets
To see how the interaction between pensions and the residence nil-rate band can magnify the tax bill, consider a financially comfortable retired couple in Brighton with total assets of roughly £2.4 million. The wife dies in May 2027, aged 78. Her husband dies 18 months later, aged 81. Their Brighton home is valued at £950,000. Between them they hold £1.15 million in defined contribution pensions: £750,000 in the husband’s name and £400,000 inherited from his late wife. Add £180,000 in ISAs, £120,000 in a general investment account and £45,000 in cash. Two adult children inherit everything.
Under the rules in place before April 2027, the picture is straightforward. The estate counts the property and the non-pension financial assets but not the pensions themselves. Chargeable value: £1,295,000. With both nil-rate bands and both residence nil-rate bands transferred to the surviving spouse, allowances reach £1 million. Inheritance tax of £118,000 is paid. The pensions pass to the children outside the estate. After tax, the combined inheritance reaches £1,982,000.
From April 2027, the picture changes sharply. The pensions are now inside the estate. Gross chargeable value rises to £2,445,000. That triggers a second problem. The residence nil-rate band tapers away at £1 for every £2 by which the estate exceeds £2 million. With the estate over the threshold by £445,000, the family’s combined residence nil-rate band falls from £350,000 to £127,500. Total allowances drop to £777,500. The result is an inheritance tax bill of roughly £667,000: more than five times the pre-2027 figure.
The pensions then attract income tax in the children’s hands, because the deceased was over 75 at death. Under the new regime, the beneficiaries can deduct from their income tax bill the inheritance tax already paid on the inherited pension portion, so the same pound isn’t taxed twice in pure arithmetic terms. On the further assumption that the children draw the inherited pots gradually over several tax years to keep within their marginal bands, one at basic rate and one at higher rate, the residue lands in their accounts at around £1.53 million between them.
The cash difference between the two regimes is roughly £455,000, or about 23 per cent of what the children would have received under the old regime. The combined effective tax rate on the inherited pension portion, blending inheritance tax and the children’s income tax, reaches around 56 per cent for the higher-rate beneficiary in this scenario. Some industry commentators have pointed to effective rates of 67 per cent in worst-case scenarios, where the beneficiary is an additional-rate taxpayer. The actual figure for any household depends on the inheritance tax allocation to the pension portion, the beneficiary’s marginal rate and the pace of withdrawal.
Two mechanisms do the damage. £1.15 million of pension wealth is now inside the estate. And because the estate exceeds £2 million, the residence nil-rate band tapers. For higher-value estates, the residence nil-rate band falls to zero entirely at £2.7 million.
For some households, that kind of exposure may justify considering life insurance as part of broader estate planning. The numbers depend on specific assumptions: that the children draw the inherited pension steadily rather than in a single tax year, that no charitable bequest is in place to bring the rate down and that the figures remain as enacted. The order of magnitude is the point. For a family with this asset profile, the difference between doing nothing and starting a conversation is six figures of inheritance.
Why the new rules bite harder on South East households
Two mechanisms compound the impact for households with a high-value home and a substantial pension. Neither is hidden in the small print. Their combination is what makes the South East story distinctive.
The first is the residence nil-rate band taper. The £175,000 per person allowance, doubled to £350,000 for a couple via spousal transfer, was designed to keep the family home out of inheritance tax. It comes with a catch. For every £2 the estate exceeds £2 million, £1 of the residence nil-rate band is lost. At a total estate of £2.7 million it has tapered to zero.
Before April 2027, pension wealth sat outside the estate and didn’t count toward the £2 million threshold. From April 2027 it does. For a Brighton family with a £900,000-plus home and combined pension wealth above £1 million, the threshold is no longer comfortably distant. In the worked example above, the family loses £222,500 of residence nil-rate band. That alone costs the estate £89,000 in inheritance tax.
The second mechanism is the age-75 income tax distinction, which is unchanged in itself. Pension withdrawals by beneficiaries are tax-free if the member died before 75 and taxed at the beneficiary’s marginal rate if the member died at 75 or over. What’s new is the interaction. From April 2027, beneficiaries of a death over 75 can face inheritance tax at 40 per cent on the pension and income tax at their marginal rate on whatever residue they then draw. HMRC confirms that there is no arithmetic double taxation, because tax already paid is deducted before income tax applies. But the combined effective rate is still steep.
Steven says the clients already engaging with the issue are starting to rethink old assumptions. ‘For years, the standard advice has been to leave the pension untouched and spend everything else first,’ he says. ‘That advice often made sense under the old rules. From April 2027, it may not. The right strategy now depends on the household, not on a rule of thumb.’
What families can actually do, and what they shouldn’t
The right response is not panic. It is to think things through carefully, knowing that the levers are limited and that the rules now sit firmly in primary legislation. Five things are worth considering.
Beneficiary nominations and wills come first. Nominations may be out of date. Wills may not reflect current intentions, particularly where pension trustees have discretion over distribution. With the new rules in place, stale paperwork carries a larger price tag. Canada Life research from November 2025 found that 27 per cent of UK over-55s have no will at all. With pension wealth now in scope, the cost of leaving that paperwork undone has risen.
Second, the order in which pension and non-pension wealth is drawn down may need rethinking. The old logic, preserve the pension and spend the ISA, was tax-efficient under the previous regime. From April 2027, drawing pension income earlier can reduce inheritance tax exposure, but only where the proceeds are spent or gifted under one of the IHT exemptions. Funds moved out of pensions and into taxable accounts or cash simply become part of the estate again. The trade-offs are real: income tax on accelerated drawdown, the £10,000 Money Purchase Annual Allowance cap on future contributions once a pension has been flexibly accessed and the longevity risk of running pots down too quickly.
Third, the normal expenditure out of income exemption deserves a second look. The exemption applies to gifts made from income, including income drawn from a pension, provided they meet the statutory conditions: regular in pattern, out of income rather than capital and not reducing the giver’s standard of living. Where those conditions are met, the gifts sit outside the estate immediately, with no seven-year clock as there is for potentially exempt transfers.
Fourth, annuities are back in the conversation for the first time in years. Data from the Association of British Insurers show that sales of annuities for pension pots above £500,000 rose 54 per cent in 2025. The ABI itself cites the 2027 changes as one factor, alongside favourable annuity rates and older buyers seeking certainty. An annuity converts the pension capital into a guaranteed income stream, removing the residual fund from the estate. Income that’s then retained rather than spent or gifted will, of course, accumulate in its place. Whether that suits a particular household depends on age, health, other assets and inflation expectations.
Fifth, talk to an adviser. Charles Stanley research from October 2025 found that, of the high-net-worth over-55s it surveyed, just 13 per cent had updated their plans to reduce the possible inheritance tax burden, with another 13 per cent having sought professional advice. That gap is what the next 12 months are for. Steven puts it simply: ‘You don’t need to make dramatic decisions. You need to understand where you stand and whether the planning that made sense five years ago still makes sense for the next twenty. That’s a conversation, not a transaction.’
Why the next 12 months matter
‘The next 12 months are not about acting in haste. They are about acting in time.’
April 2027 is the deadline. The window for thoughtful planning is now.
Awareness will rise sharply as the date approaches. The Standard Life survey caught the gap at its widest. By autumn 2026, media coverage will intensify and adviser capacity will be tested. None of that is a reason to rush, but it is a reason not to drift.
Three areas in particular reward early thinking. Annuity rates move with gilt yields, which move with macroeconomic conditions outside any household’s control. There is no optimal moment to buy an annuity. But waiting indefinitely is itself a choice. Gifting strategies under the normal expenditure exemption require an established pattern, and starting that pattern in 2026 is materially more defensible to HMRC than starting it in March 2027. Will and nomination reviews take time, particularly where multiple pension schemes and historic policies are involved.
What the new regime doesn’t change is also worth noting. Lifetime transfers are treated under the existing IHT framework, unchanged by the new rules. The seven-year clock for potentially exempt transfers still runs the same way. Pension contributions still attract income tax relief on the way in. Whatever was sensible to do under the old rules in those areas remains sensible under the new ones.
The next 12 months are not about acting in haste. They are about acting in time.
A change to be planned around, not feared
House insurance is reactive. You can’t prevent the fire, only insure against it. Pension planning is different. The 2027 changes are knowable and predictable, and there is genuine optionality in how families respond. For most households, the bottom line won’t change. For those affected, the rule shift is real and the worked example shows the scale. The response is more about lifestyle and timing than about clever tax engineering.
Two qualifications matter before any of this turns into action. The rules can shift between now and April 2027. And the right approach for any household depends on its own circumstances, so nothing in this article is personalised advice.
Three things are worth doing in the next 12 months. Check whether your estate is likely to exceed £2 million on second death, including pension wealth. Review your beneficiary nominations and your will. And have a conversation with your adviser well before autumn 2026, while there is still genuine room to manoeuvre.
If you’d like to talk through how the new rules apply to your situation, Steven Williams at rockwealth Brighton can help.