Pension IHT Changes 2027 — What Older Homeowners Need to Know

What is changing in April 2027

The October 2024 Budget confirmed a significant change to the inheritance tax treatment of pension funds. From April 2027, any unused funds remaining in a defined contribution pension at the time of death will be included in the deceased's estate for IHT purposes. This reverses a long-established principle under which pensions sat outside the estate and could be passed to beneficiaries without attracting IHT. The change was confirmed through the Finance Bill 2025 and is now settled law.

For years, many financial planners and their clients built drawdown strategies around the assumption that pensions were an IHT-efficient way to preserve wealth for the next generation. Those plans now need to be revisited. Drawing down from other assets first, and leaving the pension untouched to pass on, no longer achieves the IHT saving it once did.

The April 2027 deadline is approaching. Restructuring estate plans takes time, and the options available to someone who acts in mid-2026 are broader than the options available to someone who waits until late 2026 or early 2027.

Why this matters for homeowners with property and pension wealth

The IHT nil-rate band stands at £325,000 per person and is frozen until at least 2030. The residence nil-rate band (RNRB) adds a further £175,000 where the main home is passed to direct descendants, giving a combined threshold of £500,000 per individual, or £1,000,000 for a couple where both allowances are transferred.

At first glance, that sounds like a generous threshold. But consider the combined picture for many homeowners in the 55–75 age group:

• Property: UK average house price of £298,806 (Halifax HPI, May 2026), with many properties in the South East and other regions significantly above this level
• Pension savings: many individuals in this age group hold defined contribution pensions worth £200,000–£400,000 or more, particularly those who have benefited from decades of workplace pension contributions
• Other assets: savings, ISAs, investments, and any additional property

When unused pension funds are added to an estate that already includes a property at or above the national average, the combined value can breach the available allowances — even for individuals, and certainly for single-person estates. IHT at 40% on the excess is a meaningful cost to beneficiaries.

How equity release and gifting interact with IHT planning

Equity release is not a standalone IHT planning tool, and it is important to be clear about what it does and does not do. However, it can play a meaningful role within a broader estate planning strategy, particularly where gifting is the objective.

The key mechanism is the potentially exempt transfer (PET). Gifts made from any source — including funds released through a lifetime mortgage or equity release plan — become free of IHT after seven years, provided the donor survives the full seven-year period. Gifts made in the three to seven years before death attract a tapered rate of IHT rather than the full 40%.

Practically, this means:

• Releasing equity from your home and gifting those funds to children or grandchildren now could reduce the value of your estate over the seven-year period
• Someone aged 62 who makes a gift today could have it fully outside their estate before age 69, at which point the IHT saving is locked in regardless of what happens to pension rules
• For those who have already taken out an equity release plan, the outstanding loan balance is deducted from the estate value on death — the loan is repaid from the property sale proceeds, and only the remaining net value enters the estate

This interaction between equity release loan balances and estate values is one that is often overlooked. Existing equity release users may already have a smaller taxable estate than they realise.

What equity release cannot do, and why professional advice matters

Equity release is a long-term financial commitment and is not appropriate for everyone. It is regulated by the FCA, and regulated advice is a legal requirement before proceeding. Using equity release as part of an IHT strategy requires careful modelling: the compounding interest on a lifetime mortgage over many years needs to be weighed against the IHT saving on the gift, and that calculation depends heavily on individual age, health, property value, and the size of the gift.

It is also essential to note that IHT planning involves legal and tax considerations that fall outside the scope of FCA-regulated mortgage advice. Verity Home works alongside clients' existing solicitors, accountants, and tax advisers to ensure that any later-life lending decision fits coherently within the wider estate plan. We do not provide tax or legal advice, but we do ensure that our clients have the full picture before making any decision.

The 2027 change also has implications that go beyond equity release. How pension drawdown is structured from now until 2027, whether gifts are made before or after April 2027, and how existing will and trust arrangements interact with the new rules are all questions that require qualified legal and tax input. Anyone who built their retirement plan around the assumption that pension funds fall outside the estate needs to review that plan with their advisers now.

Learn more: Equity release and inheritance, Lifetime mortgages explained, About equity release