Could Your Pension Increase the Inheritance Tax Bill on Your Family Home?
The hidden consequence of the 2027 pension changes that many families haven’t considered.
If someone asked you today what determines the Inheritance Tax your family might pay on your estate, what would you say?
Most people would probably answer:
“The value of the house.”
That’s exactly what most people think and it’s a perfectly reasonable assumption. Unfortunately, from April 2027, it won’t always be that simple. One of the least understood consequences of the pension changes is not only will your pension be included in your IHT calculation. In some circumstances, it could also increase the tax payable on your family home.
Let’s explain why.
The allowance many people don’t know they have. Most people have heard of the £325,000 Nil Rate Band. Far fewer know about the Residence Nil Rate Band (RNRB).
In simple terms, if you leave your main residence to your direct descendants such as your children or grandchildren you may qualify for an additional Inheritance Tax allowance. For many married couples or civil partners, these allowances can combine to provide up to £1 million of assets passing free from Inheritance Tax, depending on their circumstances.
It’s a valuable relief. But it comes with an important condition. But there’s a catch…
Once your estate becomes too large, that additional allowance begins to disappear. This is known as the Residence Nil Rate Band taper. For every £2 your estate exceeds £2 million, you lose £1 of the additional residence allowance. Eventually, the allowance disappears altogether. Many people have never needed to think about this because… Until now… Their pension usually wasn’t included when calculating the value of their estate. From April 2027, that changes. Most unused pension funds and death benefits will generally form part of the calculation. Why this matters:
Let’s imagine another couple, Peter and Jane. They own:
- Family home: £1.35 million
- Savings and investments: £450,000
- Pension funds: £600,000
Here is how the upcoming changes reshape their position on a second death:
| Before April 2027 | From April 2027 | |
| Estate Value for IHT | £1.80 million (Pension excluded) | £2.40 million (Pension included) |
| Available Allowances | £1.00 million (Full allowances) | £800,000 (Home allowance tapered) |
| Taxable Estate | £800,000 | £1.60 million |
| Estimated IHT Bill | £320,000 | £640,000 |
The pension hasn’t just increased the size of the estate. It’s also reduced one of the family’s most valuable Inheritance Tax allowances.
Nothing about Peter and Jane’s circumstances has changed. Only the legislation.
Yet, because their pension has pushed their total estate over the £2 million threshold, they lose £200,000 of their home’s tax-free allowance. That single change adds £80,000 of tax directly to their family home, on top of the tax now due on the pension itself.
For years, they focused their estate planning on the house and their investments. The pension wasn’t really part of the conversation. After all, it generally sat outside the estate. Under the new rules, that same pension may now be included in the overall calculation. Suddenly, an estate that previously sat below the RNRB taper threshold may move above it.
Nothing has changed, just the legislation.
This is the point many people miss. The Government isn’t changing the rules on your home. It’s changing the rules on your pension. But because the Residence Nil Rate Band depends on the total value of your estate, changes to the taxation of one asset can have unexpected consequences elsewhere. It’s a reminder that estate planning isn’t about looking at individual assets. It’s about understanding how everything fits together.
Fathom Insight
We’ve always believed that good financial planning should look at the whole picture.
- Retirement planning.
- Investment planning.
- Tax planning.
- Estate planning.
Historically, these could sometimes be treated as separate conversations. From April 2027, they are becoming increasingly connected. Should you be worried?
Many families won’t be affected at all. Others simply need to review their existing plans rather than completely changing them. Many estates will still fall below the relevant thresholds. Others may continue to benefit from spouse exemptions and transferable allowances. The important point isn’t that everyone will lose their Residence Nil Rate Band. It’s understanding whether you might.
What can you do?
The good news is that there are still planning opportunities.
Depending on your circumstances, it may be sensible to review:
- How your assets are structured
- Whether lifetime gifting is appropriate
- Your retirement income strategy
- How your pension fits into your wider estate plan
- Whether your estate is approaching the £2 million taper threshold
The earlier these conversations happen, the more options are usually available. A question worth asking. For many years, people have asked us:
“Will my house be subject to Inheritance Tax?”
Increasingly, the better question may become:
“What is the total value of everything we own including our pensions?”
That single question could make all the difference.
Fathom’s View
Tax legislation changes, your goals usually don’t. The important thing isn’t reacting to every Budget announcement. It’s making sure your financial plan continues to work for you and your family.
The Bottom Line: This issue won’t affect every family. But if you think these changes could affect you, now is the time to consider your options, not when the rules come into force.
Coming next…
So far, we’ve looked at what the rules are changing.
Now it’s time to focus on what you can actually do about it.
In the next article, we’ll explore Five Conversations Worth Having Before April 2027
Let’s Talk
The best financial plans evolve as life changes. Tax legislation is no different. If you’d like to understand how the proposed pension changes could affect you, your family or your business, we’d be delighted to help.
We’ll explain the rules in plain English and help you decide whether your existing plans are still the right ones.
Sometimes, the best place to start is with a confidential chat over coffee.
Important: This article reflects the legislation and HMRC guidance available at the date of publication. The Government intends these changes to take effect from 6 April 2027, although legislation may be amended before implementation. Tax legislation is subject to change and the application of tax rules depends on individual circumstances. This article is provided for general information only and should not be relied upon as personal financial or tax advice.
