The death of a loved one is difficult enough without added financial stress or family disagreements.
However, major changes to inheritance tax (IHT) on pensions from April 2027 could lead to unexpected tax bills, and, in some cases, disputes between family members.
In this article, we explain what is changing, why it could cause problems and what you can do now to protect your family.
What’s changing?
At present, most pension funds sit outside your estate for IHT purposes. From April 2027, that changes. Any unused pension savings will be included in your estate and counted towards the IHT threshold.
This means your estate, including your pensions, could be taxed at 40% on anything above £325,000 for a single person; or £650,000 for a surviving spouse or civil partner.
The stated aim of this controversial legislation is to return pensions to being a means of providing retirement income rather than a vehicle for passing on wealth to the next generation tax-free.
Why this matters to you
For years, many families have relied on pensions as a tax-efficient way to pass on wealth. However, From April 2027 more estates will be chargeable to IHT and others will face significantly higher tax bills.
This could come as a shock to many — particularly for relatively simple estates where the main assets are a family home, cash savings and a pension pot.
The hidden issue: frozen pension funds
Following a death, executors, who are often family members are responsible for ensuring IHT is paid correctly and on time; and they are personally liable if it isn’t.
To protect themselves, executors can instruct the pension providers to hold back up to 50% of the value of a pension pot for up to 15 months beginning with the date of the death. This is to ensure that sufficient funds are kept in the estate to pay the IHT bill.
Executors are also under time pressure: If the IHT is not paid by the end of the sixth calendar month following the date of death, interest begins to accrue on any unpaid IHT still due. Executors often feel forced to act quickly to avoid this.
From a legal and administrative perspective, holding back 50% of a pension pot until the IHT has been settled makes sense.
But from a family perspective:
- Beneficiaries may suddenly find expected funds delayed;
- Decisions are often made by another family member (the executor);
- Communication can break down at an already emotional time.
This combination of financial uncertainty, time pressure and family dynamics can easily lead to conflict.
Typical issues may include:
- Beneficiaries questioning why pension funds have been withheld;
- Executors being accused of acting in their own interests;
- Disagreements in blended families (e.g. children vs step-parent);
- Delays or poor communication during estate administration.
What you can do now
The good news is that early planning can make a real difference.
If you know that you are the executor of someone’s will, take the time to understand your responsibilities. You are encouraged to take early advice if you think there is IHT to pay or there are pensions in the estate.
If you are a beneficiary, you are entitled to ask questions and seek legal advice. This can often clarify matters for you and prevent disputes arising.
If you have a pension, consider how the forthcoming changes to the IHT regime may affect your tax position and estate. Consider also leaving clear written instructions to your executors as to how you wish them to settle any IHT which may be due.
Open and honest communication between family members before a death occurs is often key to avoiding misunderstandings which may escalate into full-blown legal disputes.
Don’t wait until it’s too late
These changes are coming into force in April 2027 — but many families are still unaware of how significant they are.
Taking advice now can help reduce your IHT bill, avoid delays and reduce the potential for disputes.
Speak to our team
At Slater Heelis, we regularly help families deal with:
- Inheritance disputes
- Contested probate
- Estate administration issues
Our Contentious Probate and Wills, Trusts & Probate teams work closely together to find practical, effective solutions — whether you are planning ahead or dealing with a problem now.
John Gorner is a Consultant Solicitor in our Contentious Probate team. He specialises in contentious probate and trusts, residential property disputes, Court of Protection, community care law (including safeguarding), public lay and regulatory matters.
Alex Sealy is a Partner and Head of our Wills, Trusts and Probate Team. He specialises in all aspects of estate planning and administration.
If you would like to speak with John, Alex or another member of our team about this topic or any other legal matter, please call 0330 111 3131 or fill out our online contact form.