Inherited pensions and related death benefits will be brought into scope of inheritance tax (IHT) from April 2027, the Chancellor, Rachel Reeves, has announced.

Delivering her Budget speech to the House of Commons, Reeves said that the change would close the “loophole” that exempted unspent pensions from IHT.

The Office for Budget Responsibility stated that IHT will apply to all pension wealth that is transferrable at death, which it said, in practice, affects uncrystallised defined contribution (DC) pensions, crystallised DC pensions not invested in annuities, and lump sum death benefits from defined benefit (DB) pensions.

The government estimated that around 8 per cent of estates will be affected each year.

Reeves also announced that she will be reforming Agricultural Property Relief and Business Property Relief.

From April 2026, the first £1m of combined agricultural and business assets would remain exempt from IHT.

However, IHT will apply with a 50 per cent relief, at an effective rate of 20 per cent, for assets over £1m.

AIM shares will no longer be fully exempt from IHT, although 50 per cent relief will apply on all IHT for AIM shares, with an effective rate of 20 per cent.

“There were some tentative signs of a recovery in 2024, but the index had been heading downhill again since Labour’s victory in the election due to fears that Business Relief would be removed,” said Killik & Co partner, Rachel Winter.

“The index has rallied today on the news that AIM shares will attract an inheritance rate of 20 per cent rather than the usual 40 per cent."

The IHT nil rate band (NRB) will be frozen at £325,000 and the residence NRB will remain at £175,000 for a further two years to 2030, which Quilter tax and financial planning expert, Rachael Griffin, noted would pull many more estates into the IHT net.

“The NRB has been frozen since 2009 and if it had risen in line with inflation, it should now be £503,879 so freezing this until 2030 will make this threshold even more antiquated,” she stated.

“We are already seeing record breaking IHT receipts, and this change will compound this. Families with higher-value estates are more likely to seek financial advice to mitigate their tax liabilities through careful estate planning.”

St. James’s Place divisional director, retirement and holistic planning, Claire Trott, said that the decision to include pensions in IHT calculations and the freezing of allowance would likely increase the number of estates paying IHT “significantly”.

“The devil will be in the detail to determine if this includes only lump sums, or if it also includes benefits passed down by way of an income,” she stated.

“In addition, we need to know how this will work for DB pension schemes, if included, where individuals have no access to increased income to pay a charge. The delay in implementation of this change is welcome, allowing these questions to be resolved and giving individuals some time to plan."

The government also announced it would be investing £52m to digitise the IHT service from 2027/28.

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