Law firms are racing to help clients prepare for sweeping inheritance tax changes to pension funds due to take effect in April 2027

UK law firms are being urged to act immediately to protect clients from a dramatic increase in inheritance tax on unspent pension pots, as the full scale of Labour’s 2024 Autumn Budget changes becomes clear.

Andrew Day, founder and chief executive of Depledge Strategic Wealth Management, a Manchester-based financial planning consultancy, has called on solicitors to move without delay.

His firm has seen a sixfold increase in enquiries from legal firms in the first four months of this year compared with previous years, as probate, wills and estate planning lawyers begin to grasp the potential financial exposure their clients face.

“This is a seismic change that many people are currently unaware of,” said Day.

“Those who are, including lawyers looking to safeguard their clients’ assets across generations, are waking up to this issue and contacting us.

“Word is getting out on this, and not without good reason.”

How the current rules work

Under current rules, unspent pension pots have been one of the most tax-efficient methods of passing wealth to surviving relatives.

No inheritance tax is paid by the recipient, and future drawdowns are not subject to income tax if the deceased was under 75, while income tax is charged at the individual’s marginal rate if the deceased was over 75.

All of that will change when the Finance Bill 2025/26 comes into force on April 6, 2027. C

hancellor Rachel Reeves said her aim is to discourage pensions from being used as a wealth transfer tool and to encourage their use solely for an individual’s retirement.

Rates could leap from zero to 81%

Day, who leads a 17-strong team of CISI-accredited financial planning experts managing £315 million of assets under advice, warned that the combined impact of the changes could be devastating for some families.

“From April 2027, unspent pension funds will fall within the scope of inheritance tax for the first time,” he said.

“For example, a married couple with children holding a £1 million pension alongside £2 million in other assets could face an inheritance tax liability increasing from £400,000 to £940,000, plus income tax charges on the pension depending on the age at which the individual passes away. A jump from 0% to 81% can be financially ruinous if it comes unexpectedly.”

The worst-case scenario

In the worst-case scenario outlined by Depledge, a £1 million pension fund newly subject to inheritance tax could generate a liability of £400,000. On top of that, where the total estate exceeds £2.7 million, the residence nil rate band would be lost, adding up to £140,000 in further tax.

If the beneficiary is a 45% taxpayer required to draw down a fund inherited from someone who died over the age of 75, a further £270,000 in income tax could be owed, bringing the total additional tax bill to £810,000.

Day said: “In the first four months of a typical calendar year, we would expect some contact with law firms, however, this year we are meeting with six new firms. I was sat in a meeting with a potential client introduced from one law firm the other day when my phone rang and it was another law firm wanting to introduce another client to see if we could help them too.”

Planning options do exist

Effective planning options are available, but they require timely professional advice. Key strategies include making use of spouse exemptions, reviewing legal status through marriage or civil partnerships, implementing structured gifting programmes, redirecting surplus funds into beneficiaries’ pension arrangements to reduce taxable estates, and buying exempt assets or taking out life insurance.

“We have one client who managed to reduce his immediate tax exposure ahead of next April’s law change simply by entering into a civil partnership with his long-term partner,” Day said.

Law firms urged to move without delay

Depledge specialises in managing family wealth through the generations and has researched strategies employed around the world. Day’s message to the legal profession is unambiguous.

“While many legal firms are cottoning on to this already, many are slow out of the blocks.

“The message is clear: legal services firms must act now to help clients understand the implications and explore mitigation strategies before and after the rules take effect.”