Last month, we shared an article that looked at the Business Relief (BR) reforms taking effect from April 2026, which you can find here. That change alone shifts BR from an open-ended planning tool into something requiring more deliberate thought. From April 2027, a second reform arrives, and for many clients, it may prove to be the more consequential of the two.

From 6 April 2027, the Government intends to bring most unused pension funds and death benefits within the value of a person’s estate for inheritance tax (IHT) purposes. For many clients, pensions have quietly been one of the largest assets sitting outside the IHT net, so this is not a marginal adjustment but a meaningful change in how wealth is treated.

For those who have spent years building defined contribution pensions with wealth transfer in mind, this represents a shift in both structure and intent. It also changes the context in which BR and other planning tools need to be considered.

This article looks at what the pension reform means in practice and how it interacts with the BR changes already coming in 2026. In next month’s article, we will look at where BR and Venture Capital Trusts (VCTs) fit into the updated planning conversation, and how advisers might approach the two reforms together.

What is changing from April 2027

Under the current rules, unused pension funds generally fall outside a person’s estate for IHT, which has made defined contribution pensions attractive not just as retirement vehicles, but as a means of passing wealth between generations.

The Government’s stated objective in changing this is behavioural. HMRC is seeking to reduce the extent to which pensions are used and marketed as wealth transfer vehicles rather than as retirement funding mechanisms.

The draft legislation introduces a new concept, treating the pension holder as being beneficially entitled to the assets within their pension scheme immediately before death. In practical terms, this means the value of their pension pot, including any associated death benefits, will be treated as part of their estate for IHT purposes, in much the same way as property or investments are today. For many clients, estate planning has been built on the assumption that pension wealth sits outside the IHT framework. From 2027, that assumption no longer holds.

The legislation also makes clear that pension assets will not qualify as relevant business property under BR, regardless of what the pension is invested in, which removes any ambiguity for clients or advisers who may have assumed otherwise.

The double taxation question

One of the more technically complex aspects of the draft legislation is how it addresses the risk of double taxation.

Under the current rules, pension assets typically fall outside the estate for IHT but are subject to income tax when drawn by a beneficiary. From 2027, those same assets could be subject to IHT at the point of death and then income tax when withdrawn, which has understandably drawn attention from advisers.

The draft legislation proposes a partial mitigation. Where IHT has been paid on pension assets, beneficiaries may be able to claim a corresponding deduction against the income tax otherwise due when those funds are drawn.

However, this should be viewed as a partial offset rather than a complete solution. The mechanics of how the deduction will be calculated, and the conditions that apply, are still being worked through, and HMRC has indicated that further operational guidance will follow. For now, advisers should treat this as an area that will require careful attention once the detail is finalised.

What this means for estate values in practice

The most immediate implication is straightforward, but its impact can be significant. Many clients whose estates currently appear modest for IHT purposes will find themselves with a materially larger taxable estate once pension wealth is included.

A client with a family home, a reasonable investment portfolio and a sizeable defined contribution pension may not have given much thought to IHT planning to date, precisely because the pension has been sitting outside the estate. From 2027, that changes, and in some cases it changes quite sharply.

Why this matters alongside the BR reforms already in motion

These two reforms are best considered together, as they interact in ways that are not always immediately obvious and, in some cases, pull in different directions.

The nil-rate band and the RNRB taper

The nil-rate band (NRB) remains at £325,000 through to April 2031, and the residence nil-rate band (RNRB) adds up to £175,000 where a main residence passes to direct descendants.

However, the RNRB tapers away once the estate exceeds £2m, reducing by £1 for every £2 above that threshold.

A client with a £700k home, £800k of investments and a £900k pension may not have considered themselves significantly exposed under the current rules. From 2027, that same client’s estate value increases materially, and the RNRB taper may begin to erode an allowance they had been relying on.

A key planning distinction is that the estate value used for RNRB taper purposes is not reduced by BR. Holding BR-qualifying assets can reduce the tax due on those assets, but it does not reduce the headline estate value used in the taper calculation.

Lifetime transfers do achieve that, because gifts made during a person’s lifetime are excluded from the estate value for taper purposes. It is a distinction that is likely to matter for a much wider group of clients once pension wealth is brought into the picture.

The interaction with the BR cap

From April 2026, each individual will be able to claim 100% BR on up to £2.5m of qualifying assets, with unused allowance transferable between spouses and civil partners.

Assets above that threshold will attract 50% relief, resulting in an effective IHT rate of 20% on the excess.

For clients whose estates have already been structured around BR, the addition of pension wealth in 2027 may push total estate values further into the 50% relief tier. In practical terms, that means some clients who believed they had mitigated a significant portion of their IHT exposure may find themselves partially exposed again once pension assets are taken into account.

That reinforces the need to review how BR allowance is being used across the estate as a whole, rather than considering it in isolation.

Taken together, these reforms create a planning environment that is more constrained and more interconnected than the one many advisers and clients have been working within.

The good news is that BR retains its core advantages, and there are practical steps advisers can take to navigate this updated framework. We will cover those in detail in the final article in this series.

If you would like to discuss these reforms further, please contact us on 020 7845 7820 or info@beringea.co.uk.

The explanation of tax rules set out in this article has been written in accordance with our understanding of the law and interpretation of it at the time of publication. It is not our intention to offer legal, tax or investment advice, and we always recommend that investors seek professional advice that can take account of their personal circumstances before making any investment or estate planning decisions.

Important notice: issued by Beringea LLP of Charter House, 55 Drury Lane, London, England WC2B 5SQ, registered in England & Wales number OC342919 and authorised and regulated by the Financial Conduct Authority, number 496358.