Changes to the inheritance tax treatment of unused pension funds could significantly affect business owners' estate planning. Here's what accountants should consider before April 2027.
For many business owners, pensions have served two purposes: providing retirement income and preserving wealth for the next generation.
That second purpose is becoming more complicated.
From 6 April 2027, most unused pension funds and pension death benefits are expected to fall within the scope of UK inheritance tax (IHT), changing how families may pass on pension wealth.
In a recent webinar, Kevin Whelan explored the implications for accountants and their business-owner clients. His central message was practical: review pension arrangements alongside the wider estate, rather than treating them as a separate financial planning issue.
1. Why the 2027 pension changes matter for inheritance tax planning
The starting point is understanding how pension wealth interacts with existing inheritance tax allowances.
The standard nil-rate band is £325,000 per individual. A residence nil-rate band of up to £175,000 may also apply when a qualifying home passes to direct descendants.
Together, these allowances can potentially provide £500,000 per person, or £1 million for a qualifying married couple or civil partnership. However, the residence nil-rate band is reduced for estates exceeding £2 million.
The standard inheritance tax rate is 40% on the taxable value above the available allowances, subject to applicable exemptions and reliefs.
For accountants, the important consideration is the potential increase in the estate's taxable value when unused pension funds are brought into the calculation.
A client who previously expected their pension to pass outside their estate may need to reconsider their inheritance tax exposure.
This is particularly relevant for business owners with substantial property, investments, business interests and accumulated pension savings.
2. The potential interaction between inheritance tax and income tax
One of Kevin Whelan's main concerns was the combined tax exposure that beneficiaries could face.
Depending on the circumstances, inherited pension benefits may be subject to inheritance tax and income tax when beneficiaries receive or withdraw funds.
This does not mean every inherited pension will automatically face both taxes.
The outcome depends on factors including the pension arrangements, the deceased's age, the beneficiary's circumstances and the applicable rules.
Nevertheless, the possibility of overlapping liabilities makes a wider estate-planning review important.
Accountants should consider whether clients understand the distinction between the pension's value, the estate's inheritance tax liability and the amount beneficiaries may ultimately receive.
3. Why business owners should review Small Self-Administered Schemes
A significant part of the webinar focused on Small Self-Administered Schemes (SSAS).
These are occupational pension schemes that can offer business owners greater involvement in certain investment and funding decisions.
Kevin discussed how SSAS arrangements may support business planning, including investment in qualifying commercial property and secured loans to a sponsoring employer.
For example, a business owner might explore whether a SSAS could hold commercial premises used by their company.
Alternatively, a qualifying employer loan-back arrangement could provide business funding within the relevant pension rules.
However, a SSAS is not an automatic inheritance tax exemption or a way to avoid the April 2027 changes.
Scheme structure, investment eligibility, borrowing limits, security requirements and tax treatment all require specialist assessment.
The accountant's role is to identify where a review could be valuable and coordinate advice from suitably qualified pension, tax and legal specialists.
4. Gifting and life insurance deserve attention too
Pension planning is only one part of the inheritance tax discussion.
Kevin also highlighted gifting strategies and life insurance arrangements as areas worth reviewing.
Gifting from capital
Clients may be able to reduce the value of their estates through lifetime gifts.
However, the tax treatment depends on the nature of the gift, available exemptions and whether the donor survives for the relevant period.
Potentially exempt transfers, for example, generally become exempt if the donor survives seven years, subject to the applicable rules.
Gifting from surplus income
Regular gifts made from surplus income may qualify for an inheritance tax exemption where the relevant conditions are satisfied.
This makes it important to maintain evidence of income, expenditure, the pattern of gifts and the donor's ability to maintain their normal standard of living.
Life insurance
Kevin also discussed life insurance, including joint-life second-death policies and relevant life arrangements.
Appropriate cover may help beneficiaries fund an anticipated inheritance tax liability without immediately selling assets.
Policy ownership, trust arrangements, premiums and the intended beneficiaries all need careful consideration.
None of these approaches should be recommended without reviewing the client's financial position and obtaining appropriate specialist advice.
5. Five practical conversations accountants can start now
The approaching pension changes provide an opportunity to revisit estate planning with business-owner clients.
A useful starting point is to identify clients with significant pension assets, valuable businesses or property holdings.
From there, accountants can structure a review around five questions:
- What pension arrangements does the client hold? Establish the current value of pensions and identify any older or forgotten schemes.
- What could the estate be worth in April 2027? Review property, investments, business interests, liabilities and pension assets together.
- Who will inherit the pension benefits? Check beneficiary nominations and how the arrangements fit the client's wider succession plans.
- Could gifting or insurance form part of the strategy? Assess affordability, tax implications and the need for specialist advice.
- Does the client need a more detailed pension review? Consider whether SSAS arrangements, existing pension structures or business succession plans warrant further investigation.
The objective is not to recommend a particular product or arrangement.
It is to identify potential issues early enough for clients to consider their options.
Frequently asked questions: Inheritance tax and pensions from April 2027
Will pensions be subject to inheritance tax from April 2027?
From 6 April 2027, most unused pension funds and pension death benefits are expected to be included in the deceased person's estate for UK inheritance tax purposes. This represents a significant change to the treatment of pension wealth on death.
Not every pension benefit will necessarily be treated identically. Accountants should review the type of pension arrangement, the nature of the death benefits and any applicable exemptions before estimating the inheritance tax liability.
Will beneficiaries pay both inheritance tax and income tax on inherited pensions?
Beneficiaries may face both inheritance tax and income tax in certain circumstances, but this is not automatic.
Inheritance tax depends on the deceased's estate, available allowances and exemptions. Income tax treatment can depend on the deceased's age at death, the pension arrangement and how benefits are paid.
Accountants should assess the combined implications rather than assuming that a single tax rate applies to all inherited pensions.
What is a Small Self-Administered Scheme (SSAS)?
A Small Self-Administered Scheme, or SSAS, is a type of occupational pension scheme commonly used by business owners and company directors.
Subject to the relevant pension rules, a SSAS may invest in commercial property or make secured loans to a sponsoring employer.
These arrangements can support wider business and retirement planning, but they carry regulatory, investment and administrative responsibilities. A SSAS does not automatically remove pension funds from the scope of inheritance tax.
Can business owners reduce inheritance tax through lifetime gifting?
Lifetime gifting may reduce inheritance tax exposure where the relevant conditions are met.
Some gifts may qualify for annual exemptions, while others may be potentially exempt transfers subject to the seven-year survival rule.
Regular gifts from surplus income may also qualify for exemption when the statutory conditions are satisfied.
Clients should maintain appropriate records and ensure gifts do not compromise their financial security. Specialist advice is important where substantial assets or complex family arrangements are involved.
Can life insurance help families manage inheritance tax liabilities?
Life insurance may provide funds to help beneficiaries meet an inheritance tax liability.
Kevin Whelan discussed joint-life second-death cover as one possible approach for married couples planning for a liability arising on the second death.
The suitability of any policy depends on the expected liability, affordability, underwriting, ownership and trust arrangements.
Insurance does not reduce the underlying inheritance tax liability by itself, although appropriately structured arrangements may help families manage the financial consequences.
What should accountants do before April 2027?
Accountants should identify clients whose pensions could materially increase their inheritance tax exposure.
The first step is to establish pension values and review the client's wider estate, including property, investments and business assets.
Next, consider beneficiary arrangements, potential tax liabilities and whether gifting, insurance or specialist pension advice may be appropriate.
The aim is to help clients make informed decisions before the new rules take effect, rather than waiting until succession arrangements become urgent.
The key takeaway for accountants
The April 2027 changes make pension planning an important part of the wider inheritance tax conversation.
For accountants advising business owners, this means looking beyond pension contributions and retirement income.
Understanding how pension wealth, business assets and family succession plans interact can help identify risks that might otherwise be overlooked.
The most useful starting point is a structured client review, supported by specialist advice where required.
Kevin Whelan explores the inheritance tax changes, SSAS arrangements, gifting, insurance and practical planning considerations in greater detail.
Watch IHT Raid on Pensions 2027 – Steps to Protect Your Client on CPDStore
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.
