How Pension Changes Could Affect Inheritance Tax and Charitable Gifts in Your Will

From April 2027, a significant change to inheritance tax (IHT) is expected to come into force. While it may sound technical, it could have a real impact on how your estate is taxed and whether your current Will still achieves what you intended.

If you have a pension and a Will in place, this is something worth understanding.

What is changing?

At the moment, most pensions sit outside your estate for inheritance tax purposes. This has made them a very effective way to pass on wealth.

From April 2027, unused pension funds are expected to be included within your estate when calculating inheritance tax.

In simple terms, your estate for tax purposes will become larger because it will now include your pension.

Why does this matter?

Inheritance tax is normally charged at 40 percent on the value of your estate above certain thresholds.

However, there is a reduced rate of 36 percent if you leave at least 10 percent of your estate to charity.

This is where the change becomes important.

The 10 percent charity rule (the reduced rate rule when charities are included)

Many people include a gift to charity in their Will, partly to support causes they care about and partly to reduce the overall tax paid.

To qualify for the lower 36 percent rate, your charitable gift must be at least 10 percent of your chargable estate (this is after deducting any Inheritance Tax allowances your Estate is entitled to).

From 2027, because your pension is likely to be included in your estate:

• The total value of your estate increases

• The 10 percent threshold becomes higher

• The amount you need to leave to charity also increases

A simple example

Imagine your estate (excluding your pension) is £1 million, and your pension is worth £500,000.

Currently:

• Only the £1 million is considered

• You would need to leave £100,000 to charity to meet the 10 percent rule

From 2027:

• The estate becomes £1.5 million

• You would need to leave £150,000 to charity

If your Will still only leaves £100,000, you may no longer qualify for the reduced 36 percent tax rate.

What could this mean for you?

This change could have a number of unintended consequences:

• Your estate may pay more inheritance tax than expected

• Your current Will may no longer achieve the tax outcome you planned

• Charitable gifts written into older Wills may no longer meet the required threshold

This is particularly relevant if you have built up a substantial pension pot.

Is leaving your pension to charity an option?

In some cases, yes.

Gifts to charity are still exempt from inheritance tax, including those made from pensions. For some people, directing pension funds to charity can be a tax-efficient approach.

However, this needs careful consideration as part of your wider estate planning.

What should you do next?

If you already have a Will in place, it is sensible to review it in light of these upcoming changes, especially if:

• You have a pension of any size

• You have included a charitable gift in your Will

• You want to minimise inheritance tax for your family

A small change to your Will now could make a significant difference in the future.

Speak to someone who understands

At SLS Wills and More, we specialise in helping individuals and families make informed decisions about their estate planning.

If you would like us to review your Will or explain how these changes may affect you, we are here to help.

Get in touch today for clear, practical advice tailored to your situation.