New inheritance tax rule change could leave families facing £82,000 bill

Cohabiting couples risk a hefty inheritance tax(IHT) bill from 2027 after the Government confirmed that unspent pensions will be treated as part of someone's taxable estate, experts have warned.

Currently, pensions can usually be passed on tax-free if the saver dies before the age of 75. From April 2027, however, pension savings will be added to a person's estate for IHT purposes regardless of age at death, unless covered by existing exemptions. The change will hit cohabiting households hardest because they lack the spousal exemption and transferable nil-rate band available to married couples. According to new calculations from wealth manager Quilter, a single homeowner in England with an average property worth £290,395 and a £415,000 pension could leave an IHT bill of £82,158 if they die before pension age.

If the family home is jointly owned, meaning only half its value falls into the estate, the tax liability would still be £24,079 due solely to the pension being counted. Where the home is owned outright, the bill more than triples.

The impact is more significant in higher-value housing markets. In London, the combination of a £565,637 home and a £415,000 pension would leave a family facing an IHT bill of £192,254 if the property is solely owned, or £129,127 with joint ownership.

Across the devolved nations, where house prices are lower, similar cases would still generate substantial charges.

Quilter's figures suggest bills of £23,891 in Wales, £21,392 in Scotland and £20,007 in Northern Ireland for cohabiting households with average homes and pensions of the same size. These amounts could rise further if property values increase before the rules take effect.

Jon Greer, head of retirement policy at Quilter, said: "Charging inheritance tax on a pension someone could not access and will never be able to use due to passing away before the minimum pension age is optically terrible for the Government.

"It is even more unjust for cohabiting families who have no spousal relief or ability to transfer tax allowances. A grieving family with young children and an average-priced home could face six-figure IHT bills at the most distressing time.

"Married couples are protected by exemptions and allowances; cohabitees aren't. Policymakers should consider carve-outs or transitional reliefs for working-age deaths, particularly when young children are involved. Without change, this policy risks compounding the emotional toll of bereavement with a financial hit that can destabilise a family's future despite raking in very little in additional revenue."