A significant inheritance tax (IHT) rule change set for 2027 could see cohabiting families facing hefty tax bills, with pension savings now counted as part of the taxable estate. This policy shift, experts warn, could particularly impact households where pensions are a major asset, potentially leaving families with substantial financial burdens after a bereavement.
Key Changes to Inheritance Tax Law
From April 2027, unspent pensions will be added to a person’s taxable estate for inheritance tax purposes, regardless of the individual’s age at the time of death. Currently, pensions are passed on tax-free if the saver dies before the age of 75. However, under the new legislation, these savings will now be subject to inheritance tax, unless certain exemptions are met. This change is set to particularly affect cohabiting couples, who are not entitled to the same spousal exemptions or transferable tax allowances available to married couples.
Cohabiting Couples Face the Greatest Impact
According to wealth manager Quilter, cohabiting couples are likely to be the hardest hit by this rule change. Without the benefit of spousal exemptions, they could face inheritance tax bills on pensions that would otherwise have been exempt. For example, a cohabiting couple in England, with an average home worth £290,395 and a £415,000 pension, could leave an IHT bill of £82,158 if the individual passes away before pension age. If the home is jointly owned, the liability would still be significant, with a £24,079 tax bill due to the pension’s inclusion in the estate.
The situation worsens in higher-value housing markets. In London, for instance, the combination of a £565,637 home and a £415,000 pension would result in an IHT bill of £192,254 if the property is solely owned. Even joint ownership would result in a substantial £129,127 bill. The introduction of this change could place severe financial strain on families, particularly during the already distressing time of bereavement.
Wider Implications Across the UK
The changes will not be confined to England, with similar consequences for households in the devolved nations. In Wales, Scotland, and Northern Ireland, families with average property values and pensions could face IHT bills ranging from £20,000 to £23,000. These amounts could increase further depending on future property value increases. Wealth experts, including Jon Greer from Quilter, have raised concerns about the fairness of these measures, especially for families with young children or those who face bereavement at a younger age.
As the government moves forward with these changes, some experts argue that there should be exemptions or transitional reliefs for cohabiting couples, to prevent undue financial hardship. Without such adjustments, the new rule could result in a substantial and unjustifiable financial burden at one of the most difficult times in people’s lives.
