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This article was first published in our Direct Investor Magazine on 3 August

Q1: I’ve been saving into my pension for the IHT advantage. What should I do now that the rules are changing?

From 6 April 2027, unused pension funds and death benefits in registered pension schemes – including defined contribution plans and SIPPs – will be included in the deceased's estate for IHT purposes. Previously, these assets generally fell outside the estate.

Many people have been using non-pension assets to cover spending, and prioritised investing in pensions to minimise IHT. But this will no longer work and may well result in double taxation as money taken from pensions will be subject to income tax when withdrawn if you die after the age of 75.

You can withdraw from your pension from age 55 (57 from 2028) and gift the cash.

Pensions were designed to support spending in retirement, and these changes now mean that this is how they are going to be used once again. Many people are now taking money from their pensions to support their lifestyle and gifting the 25% tax-free lump sum.

You can withdraw from your pension from age 55 (57 from 2028) and gift the cash. A regular pattern of giving in this way could be seen as a gift of excess income and could immediately fall outside the estate for IHT purposes.

There are three conditions:

1. Made from income, not capital

Funds must come from net income, such as salary, pension, dividends, rental income, and interest – not from capital assets.

2. Part of your normal spending

Gifts must form a regular, habitual pattern e.g. monthly contributions, annual gifts, or planned recurring payments.

3. Leave you with sufficient income

After making a gift, you must retain enough income to maintain your usual standard of living. You cannot dip into capital to fund everyday expenses.

You will need to keep comprehensive records of income and spending and take care with pension withdrawals as the income may put you in a higher tax band.

As with all IHT planning, make sure you retain enough money to cover yourself for normal spending, and for any unexpected expenses. Finally, you can spend the pension money on enjoying life. That’s what pensions were designed for.

Q2: How does the residence nil rate band work if I sell my home and move in with family?

The residence nil rate rand (RNRB) is an additional allowance of up to £175,000 (on top of the standard £325,000 nil rate band) on which no IHT is paid. It applies when you leave your home to direct descendants (children, grandchildren, stepchildren, adopted or foster children). Some people are hesitant to sell their homes as they are concerned that this additional allowance will be lost if they do, but this isn’t the case.

Your estate may still qualify for RNRB via the downsizing addition if assets replacing the home pass to direct descendants. In practice, this means that there needs to be at least £175,000 (or the value of your house, if less) left in your estate to pass to your children.

A couple of other important points

Once your estate exceeds £2mn, the RNRB starts to taper away at the rate of £1 for every £2 over, so it’s entirely lost for assets over £2.35mn. You can regain this by gifting assets away and there’s no need to survive seven years to regain the lost allowance. It works immediately.

Like the normal NRB, the RNRB transfers on death between spouses if it’s not used on the first death. This means that there’s potentially £1mn of allowance before any IHT is payable, and even then, it’s only payable on the proportion of the estate over £1mn.

Have a financial question?

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