At a glance
- From 6 April 2027, most unused pension funds and pension death benefits will form part of an individual’s estate for IHT purposes.
- Business owners considering a sale or holding commercial property and other assets through a pension may face succession-planning considerations.
- Reviewing pension, business exit and estate plans together can help owners understand their potential exposure and available options.
With less than six months to go before most unused pension funds are brought within estates for inheritance tax purposes, business owners are being urged to consider how their succession plans may be affected.
From 6 April 2027, unused pension savings will count as part of people’s estates when inheritance tax (IHT) is calculated upon death. Under the current rules, most unused pension funds and death benefits sit outside the estate for IHT purposes.
Fewer than one in 20 estates faced an IHT charge for the 2023/2024 tax year according to the latest available data from HMRC.1 However, this is likely to increase notably as a result of the change.
According to HMRC’s own figures, an additional 10,500 estates are expected to be liable for IHT in the 2027/28 tax year. These are estates that previously would not have paid any IHT. Meanwhile, nearly 40,000 estates are expected to face a higher IHT bill than would have previously been the case.2
Business owners may be particularly affected by the forthcoming changes. Many have used pension arrangements not only to save for retirement, but also as part of longer-term succession planning for their families and loved ones.
The cost of holding commercial property in a pension
The impact is likely to be particularly significant for those who hold commercial property or other business-related assets within pension schemes such as Self-Invested Personal Pensions (SIPPs) or Small Self-Administered Schemes (SSASs).
Historically, business owners have used these pension arrangements to hold commercial property and other assets in a tax-efficient way. For example, they allow rental income from the business to be paid into the pension tax efficiently, while keeping the property’s value outside of the estate for IHT purposes.
However, with pensions counting towards the value of an estate for IHT purposes from April of next year, holding commercial property in a pension could increase the estate’s exposure to IHT. This may make doing so less attractive for business owners, although the suitability of doing so will also depend on the owner’s wider circumstances and objectives.
The changes may also create a practical problem for families. Inheritance tax is generally due within six months of the end of the month of death, but commercial property can take time to value or sell. This could make settling an estate more complicated if a pension contains assets that are difficult to sell quickly.
In some cases, a tax bill may fall before sufficient cash is available to pay it, potentially creating an “asset rich, cash poor” situation and placing pressure on families at an already difficult time.
Passing down business wealth
Adding pensions into the IHT net pushes more overall estates above the nil-rate band thresholds. It also makes it more complex for those looking to exit their business and pass on the proceeds of their hard work to beneficiaries.
Business owners have already faced tighter caps on passing down trading assets through their estates. In the 2024 Autumn Budget, the government announced that it would be capping the 100% tax relief available through business relief (BR) and agricultural property relief.
These reliefs allow estates to reduce the value of eligible agricultural or business property for IHT purposes. To qualify for BR, the property must meet several conditions. The key one of these is that it must have been owned for at least two years before the estate owner’s death, or before it was transferred.
From 6 April 2026, the first £2.5 million of qualifying agricultural and business property in an estate can receive 100% relief. Qualifying property above that allowance generally receives relief at 50%. Any unused allowance can be transferred to a surviving spouse or civil partner.
Business owners with qualifying agricultural or business property above the £2.5 million allowance may therefore face a larger IHT liability than under the previous rules.
Tony Mudd, SJP’s Divisional Director of Third Party Products and Services says: “Inevitably, at some point business owners will want an exit. When they then sell their company and receive the cash, they move from having no or reduced IHT liability on the business to potential exposure on the proceeds. From April 2026 the 100% business property relief allowance is also capped, so the position can already be tighter than many expect.
“Separately, most unused pensions that sat outside the estate on 5 April 2027 will, for deaths on or after 6 April 2027, form part of the estate. For someone with a substantial pension this can increase the IHT liability significantly.
“Too many owners are not fully aware of the combined effect. They are focused on maximising the value of the business and managing the CGT consequences of a sale and can overlook that they may face a much larger IHT problem than before.”
Depending on their circumstances and objectives, business owners may have a range of planning options. These could include gifting, trusts, insurance or changes to the way retirement income is taken. Each carries different tax and financial consequences so advice should be taken before any action is considered.
For many business owners, pensions have not only been a retirement savings vehicle but have also formed part of a broader succession planning strategy. By helping pass wealth to future generations in a tax-efficient way, they have often played an important role in estate planning. As the rules change, some business owners may need to revisit existing succession plans to ensure they still meet their objectives. Talk to us to see how we can help you and your business.
Business exit strategies may include the referral to a service that is separate and distinct to those offered by St. James’s Place.
Sources
1HM Revenue and Customs. Inheritance tax liabilities statistics: commentary – 30 July 2026
2HM Revenue and Customs policy paper: Inheritance tax on unused pension funds and death benefits – 21 July 2025
SJP Approved 16/10/2026