Pensions & Inheritance Tax: What Family Businesses Need To Know Before The 2027 Rule Changes

Succession planning remains one of the biggest challenges facing family businesses as they grow and create value. Deciding how to pass hard-earned assets to the next generation in a fair and tax-efficient way requires careful planning, thoughtful decision-making and, in many cases, a degree of family diplomacy. Recent years have brought a series of significant tax changes that business owners must navigate.

April 2026 saw major reforms to Business Relief and Agricultural Property Relief, and further change is on the horizon with the planned inclusion of most unused pension funds within the Inheritance Tax regime from April 2027. Together, these developments are reshaping the succession planning landscape and prompting many family businesses to review their long-term wealth transfer strategies.

The End of a Valuable Estate Planning Advantage

For decades, pension funds have been one of the most effective tools for passing wealth between generations. The rules have allowed the pension owner a great degree of flexibility over the level of income that they can withdraw whilst protecting the residual fund from Inheritence Tax (IHT) on their eventual death. This means that significant pension savings could be passed to children, grandchildren or other family members without a charge to the swingeing 40% rate of IHT. Many business owners have therefore prioritised spending other assets first, leaving pension wealth intact for future generations.

That is about to change. From 6 April 2027, most unused pension funds and pension death benefits will be brought within the scope of Inheritance Tax (IHT): on death, the value of the remaining pension fund will be added to the rest of the estate when calculating the amount of IHT payable.

The government says the move is intended to ensure pensions are used primarily for retirement income rather than as a vehicle for intergenerational wealth transfer. For many family business owners this feels like an attack on carefully laid planning strategies.

Why Family Businesses Are Particularly Exposed

Family-owned firms often have wealth tied up across several asset classes:

• Business interests

• Commercial property

• Family homes

• Personal investments

• Pension funds

Often the business assets have been earmarked for those members of the next generation working in the business with pension and other assets promised to those children whose careers lie elsewhere. In addition to the extra cost of the tax, the changes can bring inequity for the distribution of an estate.

Some families that previously expected to remain below IHT thresholds may find themselves above them once pension assets are counted. Others already facing IHT may see their liabilities increase significantly.

What Remains Protected?

The changes are significant, but they do not mean every pension will immediately face a 40% tax charge.

Existing IHT allowances and exemptions will still apply. These include:

• The standard nil-rate band of £325,000

• The residence nil-rate band, currently worth up to £175,000 in qualifying circumstances

• Spouse and civil partner exemptions

• Charitable exemptions and reduced rates for qualifying charitable gifts

  
  

In addition, certain pension-related benefits remain outside the scope of the new rules, including many death-in-service benefits provided through registered pension schemes. Establishing a death in service scheme, or increasing the insured amount can be a solution to provide for dependants or leave additional liquid funds for family members facing an IHT bill.

The Double-Taxation Concern

One of the most controversial aspects of the reform is the potential interaction between inheritance tax and income tax.

Under existing pension rules, beneficiaries who inherit pension assets after the member's death may still pay income tax on withdrawals if the deceased died aged 75 or over. From April 2027, some inherited pension wealth could first be subject to IHT as part of the estate and then be taxed again through the income tax system when beneficiaries access the funds.

Industry bodies and pension providers have raised concerns that this could substantially reduce the value ultimately received by the next generation, particularly where beneficiaries are higher-rate taxpayers.

A New Challenge for Succession Planning

For family businesses, succession planning has never been solely about who takes over the company. It is about preserving wealth, providing liquidity and ensuring tax liabilities do not force unwanted business decisions.

The inclusion of pensions within the taxable estate means many business-owning families should revisit long-established assumptions. Questions worth considering include:

• Should retirement income strategies be reviewed?

• Is the balance between pension wealth and other investments still appropriate?

• Are wills and trust arrangements up to date?

• Will beneficiaries have sufficient liquidity to meet tax obligations?

• How does the new regime affect wider family succession plans?

The answers will vary significantly between families, but the need for review is becoming increasingly clear.

Time to Act, Not Panic

While the reforms do not come into force until April 2027, they have already been legislated and are now part of the planning landscape.

The key message for family businesses is not to make hasty decisions, such as large pension withdrawals that could trigger immediate income tax consequences. Instead, we encourage business owners to take a holistic view of their estate, retirement income requirements and succession objectives.

The inclusion of most unused pension funds within the IHT regime from 6 April 2027 marks a fundamental shift in UK wealth and succession planning. For family-run businesses, where long-term stewardship and intergenerational transfer are central priorities, the reform deserves close attention.

Pensions will remain an important savings vehicle, but their role as a highly effective inheritance tax planning tool is set to diminish. Families that begin reviewing their arrangements now will be better placed to adapt, minimise disruption and preserve wealth for the next generation.

An Invitation to Family Business United Readers

Any family business that wishes to review it’s options should take professional and independent advice. Brooks-Financial understands that every business is different and no two families are the same. If you would like to arrange a free consultation with one of our advisers we will be pleased to help. The free review is a practical starting point.

About Brooks-Financial: Brooks-Financial advises business owners on all aspects of financial planning, wealth management and investing. Our expert advisers take a holistic approach centred around you.

To arrange your free review, please e-mail: groupadmin@brooks-financial and quote Family Business United.

About Brooks Financial

Brooks Macdonald Group plc is registered in England and Wales (Company Number: 04402058, Registered Office: 40 Leadenhall Street, London, EC3A 2BJ). It is the parent company of our group of companies. “Brooks Macdonald” is a trading name used by certain companies within our group. Several of our companies provide services that are regulated by the United Kingdom’s Financial Conduct Authority.

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Brooks Financial does not provide tax advice and independent professional advice should be sought’ The information in this document does not constitute advice or a recommendation and investment decisions should not be made on the basis of it.