Inheritance tax has a reputation for being complicated, but most of what actually matters comes down to two allowances, a freeze that’s pulling more estates into scope every year, and one significant change that’s now law and still catches people off guard.
Here’s what’s actually available to you right now, and the shift you need to know about before April 2027.
The two allowances
Every individual has a nil-rate band of £325,000, the amount you can leave free of inheritance tax before the 40% rate applies to anything above it. On top of that, a residence nil-rate band of £175,000 is available when a qualifying home passes to direct descendants, children, grandchildren, or their spouses. Combined, that’s up to £500,000 an individual can pass on tax-free, or up to £1 million for a married couple or civil partnership, since any unused allowance transfers to a surviving spouse.
Both allowances have been frozen since 2009, and the 2025 Budget extended that freeze again, to April 2031. Nothing about that sounds dramatic on its own, but the practical effect is real: as house prices and asset values rise and the threshold doesn’t, more estates get pulled into inheritance tax every year without anyone’s actual wealth changing in any meaningful sense. This is often called fiscal drag, and it’s one of the main reasons inheritance tax now affects a noticeably wider group of families than it did even a decade ago.
The catch on the residence allowance
The residence nil-rate band is the allowance people most commonly assume they’ll receive in full, and the one most likely to be reduced without anyone noticing until it’s too late to plan around.
It only applies when a qualifying home passes to direct descendants, so estates without a property, or where the property isn’t left to children or grandchildren, don’t benefit from it at all. It also tapers away for larger estates, reducing by £1 for every £2 that the net estate exceeds £2 million, and disappearing entirely once an individual’s estate passes £2.35 million. For estates near that threshold, relatively small decisions, about lifetime gifts, or how assets are structured, can make a meaningful difference to whether this allowance survives intact.
The change that’s now law, not just proposed
From 6 April 2027, most unused pension funds and pension death benefits will be brought into the value of a person’s estate for inheritance tax purposes. This isn’t a proposal still under consultation. Finance Act 2026 received Royal Assent in March, and the government expects the change to affect around 8% of estates every year.
For decades, the standard advice for anyone with other assets available was to leave pension savings untouched for as long as possible and draw on other savings first, since pensions generally sat outside the taxable estate entirely. That advice no longer holds. From April 2027, unused pension funds will typically be added to the estate before inheritance tax is calculated, which means a strategy a lot of people have been quietly relying on for years is about to work very differently. Exemptions remain for pensions passing to a surviving spouse or civil partner, and for registered charities, but the general “pensions sit outside your estate” assumption is coming to an end.
Awareness of this change is still genuinely low. If your own or a family member’s estate planning has been built around leaving a pension untouched, this is worth revisiting well before the April 2027 date, not after it.
Married or in a civil partnership
Any part of the nil-rate band or residence nil-rate band that goes unused on the first death transfers to the surviving spouse or civil partner, which is how a married couple can potentially pass on up to £1 million tax-free between the two allowances. This transfer isn’t always automatic in practice, it depends on how an estate and any wills are structured, so it’s worth confirming this is genuinely set up correctly rather than assuming it happens by default.
Why this is worth planning for now, not later
None of these allowances are complicated individually. What catches people out is assuming they apply in full automatically, or building plans around rules that are about to change without realising it. A conversation now, while there’s still time to adjust ahead of the April 2027 pension change, puts you in a considerably better position than reacting to it after the fact.
Final Thought
A quote from our Principal, Sunil Aggarwal:
“We start these conversations with what someone actually wants to happen, not the tax rates. The rates come second.
Once that’s clear, the planning itself is usually straightforward. What’s changed recently is that a few of the old assumptions, particularly around pensions, no longer hold, and it’s worth knowing that before you build a plan around them.”
If you’re not sure whether your current arrangements make the most of both allowances, or what the pension change means for your own planning, that’s exactly the conversation worth having.
Book a confidential estate planning conversation with DRS and we’ll help you protect what you’ve built, with an accurate picture of the rules as they actually stand.
- Email: info@drs-tax.com
- Telephone: 020 8059 1891
- Or submit an enquiry via our Contact Us page