I wish to scale back inheritance tax on a £700k property however I’ve no need to make presents: HEATHER ROGERS replies

I have property worth approximately £400,000 at present and my pension fund is held in a Self-Invested Personal Pension (Sipp), current value £300,000. I am aged 74.

Since retiring, I have taken some payments from the pension fund including the maximum tax-free sum but have not yet commenced receiving an annuity as a single life pension.

I am concerned at the liability for inheritance tax from next year. I have three siblings and have no desire for gifting. Your suggestions would be appreciated.

Heather Rogers, founder and owner of Aston Accountancy and This is Money’s tax expert, replies: Currently, pension funds are not normally included in your estate for inheritance purposes, meaning they are a very tax efficient way both accumulating and passing on wealth to the next generation.

From 6 April 2027, however, this will all change. I will cover the changes and then come back to your specific situation at the end.

Pensions and inheritance tax

Unused pension funds, meaning the value of your fund at the date of your death, will be included in your estate, subject to a few exemptions listed below, following the passing of the Finance Act 2025/26 which received Royal Assent in March 2026.

The idea is to make people use their pension funds to fund their retirement, rather than to use them as a tax planning vehicle to pass on wealth.

The Government estimates that during the 2027/28 tax year around 10,500 estates will have to pay inheritance tax that they wouldn’t have had to pay before as a result of this measure, out of around 213,000 with unspent pension assets.

Many more will have to pay more inheritance tax than they would have done prior to the change in the rules.

Whether your pension attracts inheritance tax will depend on the value of your estate and the amount of ‘nil rate band’ and ‘residence nil rate band’ available (see the box below) or whether your pension is exempt from inheritance at the time of your death.

If you are married or in a civil partnership and live in the UK then on the first person’s death, if anything they own is left to their spouse or civil partner, there is no inheritance tax to pay on the transfer of assets from the estate to the surviving spouse or civil partner.

Any unused NRB or unused RNRB can be passed on and used against the estate on the second death.

If a couple live together but aren’t married or civil partners, they can’t pass on assets to each other free of inheritance tax when they die.

In this situation, the NRB and RNRB also can’t be transferred to the surviving partner if they aren’t used on the first death.

Unused pensions are exempt from inheritance tax if left to your spouse or civil partner or to charity, and death in service benefits are also excluded.

Something else to be aware of is that pensions will not benefit from business property relief or agricultural property relief, even if the underlying assets held within the pension would qualify for relief if held personally.

To sum up, the unused value of your pension available to pass onto your beneficiaries will push up the value of your estate for inheritance tax purposes.

It will also mean that for those estates around the £2million mark, allowances such as the RNRB may be lost.

What about other tax on inherited pension funds?

If you inherit a pension pot, then whether you pay income tax on any payments from the fund will depend on:

– The age of the person who died

– The type of pension

– The type of payment you receive.

Most pension payments are free of income tax, if the original owner dies below the age of 75, subject to some restrictions.

Normally, income tax is applied if the person who died was over the age of 75. More can be found on this here: Tax on a private pension you inherit

This is the case now and will remain so after April 2027, meaning that pensions will in future be hit twice: both by inheritance tax and by income tax if the estate attracts inheritance tax.

What action can you take now?

Here are some general suggestions for anyone worried that the size of their pensions when they die will prompt or increase an inheritance bill.

– You should speak to a financial adviser or a financial planner who will review your particular situation.

– You may wish to review your strategy when it comes to financial assets, as moving more money into your pension may no longer be the best option.

– Bear in mind that your pension tax free cash is only available whilst you are alive.

– If you are drawing your pension, you may want to revisit your retirement spending plans and how you are funding your retirement.

– Revisit your letter of wishes which is the letter that details what you want to happen to your pension when you die.

– You may wish to consider more lifetime cash gifts.

– Consider an annuity, which gives a guaranteed income which cannot be changed but will reduce the size of your pension pot.

Those annuities that continue to pay out after death will be exempt if paid to a spouse or civil partner.

Where there are continuing guaranteed payments under an annuity to someone other than a spouse or civil partner, the market value of the remaining payments is included in the estate.

– You can also consider a discounted gift trust, which allows the settlor (or settlors) – this can be you and your spouse or civil partner – to make an inheritance tax efficient gift, usually cash, into a bond type investment.

The settlors retain a right to fixed regular payments from the gifted capital for the remainder of their lifetime.

The value of the settlor’s gift for inheritance tax will be discounted by the estimated value of these future payments.

– Another trust to consider is a loan trust. Using a loan trust allows you to access the original capital – the loan – but the growth on the invested funds will not be included in your estate for inheritance tax purposes.

The outstanding loan to the trust remains in your estate for inheritance purposes. The underlying investment for a loan trust is usually an insurance bond.

Trusts involve costs and taxes and may not be worth it unless you are wealthy. Always consult a qualified professional first, and beware that some unscrupulous firms sell unsuitable trusts to the unwary, and it is costly to unwind them afterwards.

– Consider leaving money to charity, because if 10 per cent or more of your net estate goes to good causes the inheritance tax rate reduces from 40 per cent to 36 per cent.

What about your situation?

In your question, you don’t mention having a spouse or children, and in that case you would only have the £325,000 nil rate band to offset, meaning everything above that would be subject to inheritance tax.

Bear in mind that you may need care and assistance sometime in the future and therefore it is important to put yourself first regarding your estate.

If you are financially secure you can afford the best care that you need without worry and that must always be your main priority.

You say you have not yet started to draw your annuity, which is a single life annuity.

If you have already purchased your annuity and the cooling off period has passed – often 30 days or so – then you can’t change it or cancel it.

If you have deferred payments until a certain date, that is usually set in stone too.

A single life annuity is one that usually dies with you.

The payments stop on your death and unless there is a guarantee period after you die, where payments continue to a beneficiary, or you have purchased value protection, which pays out the remainder of the pot to your named beneficiaries on your death, then any residual funds are usually lost.

Basically, if there is no money to pass on to a beneficiary after your death then no inheritance tax will be payable on it as there is no asset.

If you only use part of your Sipp to buy an annuity and use the remainder for drawdown, then the any funds left in the non-annuity part will be included in your estate for inheritance tax.

Have a discussion with a financial adviser or a financial planner regarding your exact circumstances, as they can advise on your income and cash assets, and whether any of the other suggestions I have made above may be suitable for your circumstances.