Adding pensions to the estate does not just create one tax charge. Near £2 million, it can trigger a second.
Most discussion of the announced pension changes focuses on the obvious effect: pension funds joining the taxable estate and facing inheritance tax at 40%. But for estates near the £2 million mark, there is a second effect that is less well known and can be just as expensive. The government has announced plans to include pension funds in your taxable estate from April 2027. This has not yet been confirmed in law and could change.
The residence nil-rate band gives each person up to £175,000 of additional tax-free allowance when the family home passes to direct descendants. A couple can use up to £350,000 between them. You can read the full mechanics in our guide to the nil-rate band and residence nil-rate band.
The catch is the taper. Once an estate exceeds £2 million, the residence nil-rate band is reduced by £1 for every £2 above the line. In the taper zone, each extra pound of estate value is effectively taxed at 60%, not 40%, because it both incurs tax itself and strips away allowance.
Today, pension funds generally sit outside the estate, so they do not count towards the £2 million test. A family with a £1.7 million estate and £400,000 of pensions is comfortably clear of the taper under current rules.
Under the announced changes, that same family's position would look very different from April 2027. The pension would count, the measured estate would become £2.1 million, and the taper would begin to bite. Many families who have never thought of themselves as being anywhere near the £2 million line would cross it purely because of assets they were previously told to ignore.
That £20,000 is on top of the inheritance tax now due on the pension fund itself. The taper is the quiet second hit.
Couples feel it twice as hard. A surviving spouse holding the combined estate can lose up to £350,000 of residence allowances to the taper. For a couple's estate, the allowance disappears entirely once the survivor's estate reaches £2.7 million. Adding two pension funds to the measured estate makes that far easier to reach than most families expect.
Find out if you are near the line. Add up everything, including pensions. If the total with pensions is anywhere above roughly £1.8 million, the taper deserves your attention before April 2027.
Reducing the estate below £2 million protects the allowance. Lifetime gifts, regular gifts from surplus income, and charitable legacies can all bring the measured estate down. In the taper zone, every £2 of reduction saves £1 of allowance as well as the tax on the £2 itself, which is why planning here has an outsized effect.
Pension decisions interact with the taper. Drawing pension income, and the timing of tax-free cash, change what would be left in the fund at death. These decisions carry income tax costs today and should be weighed carefully, ideally with advice, against rules that are announced but not yet confirmed.
Our calculator applies the £2 million taper automatically and lets you model your estate both with and without pensions included from April 2027. If the taper is reducing your allowances, it shows you by exactly how much. For the wider picture on the announced changes, start with our guide to pensions and inheritance tax from 2027.