For years, the standard advice for anyone with a healthy pension was simple: leave it alone. Spend your other savings first, and let the pension pass to your children or grandchildren without inheritance tax touching it. Pensions sat outside your estate for these purposes — one of the few genuinely tax-efficient corners of UK financial planning.
That advice is about to stop working.
From 6 April 2027, most unused pension funds and pension death benefits will be brought into the value of your estate for inheritance tax purposes. This isn't a proposal under discussion — the Finance Act 2026 has already received Royal Assent, so the change is now law, with implementation scheduled for that date.
In practical terms: if you die on or after 6 April 2027, the unused portion of your pension will typically be added to everything else you own — your home, savings, investments — when working out whether your estate owes inheritance tax, and how much.
Exemptions for spouses and civil partners remain in place, and death-in-service benefits are excluded. But for a great many households, particularly those who built up a pension precisely because it wouldn't be taxed on death, this is a significant shift.
The honest answer is: more people than expect it. Estates that were never close to the inheritance tax threshold (currently £325,000, or up to £500,000 with the residence nil-rate band in many cases) are the ones most likely to be caught out — not because they're wealthy in any obvious sense, but because a pension pot that was never going to be touched during retirement suddenly counts toward a threshold it never used to.
Independent estimates put the number of newly-affected estates in the tens of thousands in the first year alone, with many more households finding an existing liability increases.
Here's what doesn't get nearly enough attention: there's a well-established, entirely legal exemption that's particularly well suited to this exact problem.
It's called the "normal expenditure out of income" exemption — section 21 of the Inheritance Tax Act 1984, if you want to look it up. In plain terms: if you make regular gifts out of your income, and those gifts don't reduce your standard of living, the gifts are immediately outside your estate for inheritance tax purposes. There's no cap, and unlike most gifting rules, no seven-year wait for the gift to become exempt.
The logic is straightforward once you see it: rather than letting surplus income accumulate into an estate that gets taxed at 40% on death — pension income included — you give it away while you're alive to see it used, and it never becomes part of the taxable estate in the first place.
The exemption has three conditions, and all three need to be genuinely met:
None of this is complicated. What actually causes claims to fail is much simpler: nobody wrote anything down. The exemption is claimed by executors, after death, using HMRC form IHT403 — and by that point, the person who could explain the pattern of gifting, the reasoning, and the intention behind it is no longer available to do so. A genuine pattern of gifting with no paper trail is very hard to defend; a documented one, with dated letters and a running record of income and expenditure, generally isn't.
If this applies to you, three things matter more than anything else:
This is precisely the gap The Giving Ledger was built to close — a plain-English guide to the rules, the letter templates you actually need, and a tracking spreadsheet built in the shape HMRC's own form expects.
This article is provided for general information only and does not constitute financial, tax, or legal advice. If your circumstances are complex, speak to a solicitor, accountant, or FCA-regulated financial adviser.
More from the blog: The Gifting Trap — seven mistakes people make reducing IHT →