October 9, 2026/
Gifting Shares to Family Members: Capital Gains Tax, Holdover Relief and Family...
A warning that families could face a tax increase equal to more than 90% of an inherited pension’s value is bound to cause concern. The figure comes from an extreme example, but the change behind it is real: from 6 April 2027, most unused pension funds and pension death benefits will count towards a deceased person’s estate for inheritance tax (IHT). GOV.UK
Most unused pensions will be included when IHT is calculated for deaths on or after 6 April 2027. If the pension owner dies aged 75 or over, beneficiaries may also pay income tax when they take taxable pension benefits. The reported 91% figure arises in a particular example because including the pension also removes an inheritance tax allowance on the family home. It is not a standard tax rate on inherited pensions. GOV.UK
In an illustration attributed to NFU Mutual, a married couple have £2 million of other assets and £700,000 in pensions. Everything passes to the surviving spouse on the first death and later to their children. The example assumes that both spouses’ ordinary IHT nil-rate bands and residence nil-rate bands are available, and that the home meets the qualifying conditions.
Before the change, the £700,000 pension is outside the IHT estate. With £650,000 of ordinary nil-rate bands and £350,000 of residence nil-rate bands, IHT on the £2 million estate is £400,000.
If the survivor dies on or after 6 April 2027, the pension brings the estate to £2.7 million. The residence nil-rate bands are then fully tapered away. IHT rises to £820,000. The £420,000 increase comprises £280,000 from bringing the pension into the IHT calculation and £140,000 from losing the residence nil-rate bands.
If the survivor dies aged 75 or over, taxable pension benefits taken by the children can also attract income tax. NFU Mutual’s example estimates a further £219,326 of income tax. That brings the illustrative increase in the family’s total tax bill to £639,326, around 91% of the £700,000 pension’s value. Part of that increase, however, is IHT arising on the wider estate after the housing allowance is lost. HMRC does not charge a 91% tax rate on the pension.
The income tax result depends on each beneficiary’s circumstances and when benefits are taken. HMRC’s technical note also explains that a beneficiary who bears IHT attributable to their pension benefits should not pay income tax on that IHT amount. Simply adding a 40% IHT rate to a 45% income tax rate gives the wrong answer. GOV.UK
Yes. Pension benefits inherited when the member dies before 75 are generally free of income tax if the relevant conditions and allowances are met. Where the member dies aged 75 or over, beneficiaries are generally taxed at their own marginal income tax rates when they receive taxable pension benefits. From April 2027, IHT may also apply in either age scenario, depending on the estate. GOV.UK
Age 75 matters to the beneficiary’s income tax treatment on death. It is not a deadline by which everyone must take their own tax-free pension lump sum. Taking cash solely in response to the rule may bring money into the estate, reduce future retirement income and leave the family worse off overall. GOV.UK
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The starting point is a calculation of the whole estate: pensions, property, other assets, liabilities and available IHT allowances. Check who is likely to receive each pension and whether the home will pass to qualifying descendants. For estates near or above £2 million, the effect on the residence nil-rate band deserves particular attention.
Withdrawals and gifts then need to be tested against the owner’s retirement needs. Regular gifts from surplus income can qualify for an IHT exemption if they form part of normal expenditure, are made from income and leave enough to maintain the donor’s usual standard of living. Keep records of income, spending and gifts. Pension withdrawals may themselves trigger income tax, so calculate what is actually available to give after tax. GOV.UK
Review pension nominations, wills and the cash available to pay IHT together. Under the new rules, personal representatives will be responsible for reporting and paying IHT on pension funds, making a complete record of pension schemes especially useful. GOV.UK
The 91% figure shows how several tax rules can interact in an unusual case. It does not predict what every family will pay. The April 2027 change makes it more important to include pensions in estate planning, particularly where total assets approach or exceed £2 million. The right approach depends on the estate, the beneficiaries and the income the pension owner needs throughout retirement.
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From 6 April 2027, most unused pension funds and pension death benefits will be included in the deceased person’s estate when inheritance tax (IHT) is calculated. The rule applies when the pension member dies on or after that date; paying benefits later does not bring an earlier death within the new rules. Some benefits, including death-in-service benefits from registered pension schemes, are excluded. Whether IHT is due still depends on the estate’s value and available exemptions and allowances. GOV.UK
Including a pension can push an estate above £2 million, causing the residence nil-rate band to taper away. This additional IHT allowance can apply when a qualifying home passes to direct descendants. It reduces by £1 for every £2 above the £2 million threshold. In the article’s example, adding a £700,000 pension removes £350,000 of available residence nil-rate bands, increasing IHT by £140,000 in addition to the tax attributable to the pension. www.gov.uk
Review it before the rules take effect on 6 April 2027, particularly if your property, savings and pensions together approach £2 million. Check pension values, beneficiary nominations, your will and any transferable IHT allowances. The new treatment depends on the date of death; there is no separate deadline to withdraw a pension. Reviewing early gives you time to assess whether a proposed change would affect the income you need in retirement. GOV.UK
Taking tax-free pension cash does not automatically avoid IHT. Money withdrawn and still owned at death may form part of your estate, while the withdrawal reduces what remains invested for retirement. Age 75 mainly affects the income tax treatment of benefits inherited by someone else; it is not a deadline for taking your own tax-free lump sum. Calculate the effect on both your estate and retirement income before withdrawing funds. www.gov.uk
For deaths on or after 6 April 2027, personal representatives will generally need to identify pension benefits covered by the new IHT rules and include them in the estate information reported to HMRC. They will be responsible for reporting and paying any IHT due. Keep an up-to-date list of pension schemes and policy numbers so the estate’s representatives can obtain valuations and distinguish benefits within the rules from those excluded. www.gov.uk
The 91% figure measures the increase in a family’s total tax bill in a particular illustration against the pension’s value. It combines IHT attributable to including the pension, extra IHT caused by losing the residence nil-rate band, and income tax on taxable benefits inherited after a death at age 75 or over. It is neither a 91% IHT rate nor a typical outcome. The result depends on the estate and its beneficiaries.
If the pension member dies aged 75 or over, taxable benefits you receive are generally charged at your marginal income tax rate. The amount depends on your other income and when and how you take the benefits. From April 2027, IHT may also arise within the estate, but HMRC’s rules allow for a reduction in taxable pension income where you bear IHT attributable to those benefits. Simply adding the headline tax rates gives the wrong result. www.gov.uk
Regular gifts from surplus income may qualify for the normal expenditure out of income exemption, without a seven-year survival requirement, if all its conditions are met. The gifts must form part of normal expenditure, come from income and leave you enough to maintain your usual standard of living. Taking pension income to fund them can itself trigger income tax. Keep records of withdrawals, income, spending and gifts, and check that the arrangement remains affordable. GOV.UK
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