Pension IHT changes: What they mean for charitable giving

Key Takeaways

• From April 2027, unused defined contribution pension funds will be included in the IHT estate, increasing the taxable baseline amount.
• Charitable IHT reliefs are unchanged: gifts to UK-registered charities remain fully IHT-exempt, and the 36% reduced rate for estates donating 10%+ still applies. However, because pensions will inflate the estate value, the absolute amount required to reach the 10% charitable threshold will rise for many clients.
• Financial Advisers should review wills, pension nominations, and legacy strategies with clients ahead of implementation.

The UK government has confirmed that existing charitable inheritance tax (IHT) reliefs will remain unchanged despite forthcoming reforms that will bring unused pension funds within the scope of IHT from April 2027.

In comments reported by Citywire, HM Treasury clarified that while pensions will be included in the taxable estate for IHT purposes, the long-standing exemptions for charitable bequests will continue to apply. Gifts to UK-registered charities will remain fully exempt from IHT, and the reduced 36% IHT rate for estates that leave at least 10% to charity will remain in place.

What “unchanged” charitable IHT actually means

The reassurance relates to the structure of charitable relief, not to the size of the estate against which it is measured.

Under current rules, if at least 10% of an estate’s taxable “baseline amount” is left to charity, the IHT rate applied to the remaining taxable estate falls from 40% to 36%. That mechanism is not being rewritten.

However, from April 2027, unused pension funds are expected to form part of the IHT estate. Historically, pensions have sat outside the IHT net, making them an efficient vehicle for intergenerational wealth transfer. Once included, they will enlarge the estate for IHT purposes and therefore increase the “baseline amount” used to calculate the 10% charitable threshold.

In practical terms, this means:

• The relief itself remains intact.
• Charities will continue to receive gifts free of IHT.
• The 36% reduced rate remains available.
• But the amount required to satisfy the 10% test may rise where significant pension assets are involved.

The rule has not changed but the numbers feeding into it have.

Pensions to be included in IHT: A shift in planning dynamics

The inclusion of pensions within IHT represents one of the most significant estate planning changes in recent years. For many clients, pensions have been deliberately preserved and passed down the generations precisely because of their favourable IHT treatment. Bringing those assets into scope alters that calculus.

For individuals with sizeable pension pots, the estate value used in IHT calculations will increase, potentially pushing more estates into charge or increasing liabilities. At the same time, charitable planning may become more strategically relevant, particularly where donors were already close to the 10% threshold.

For example, where a client previously needed to leave £100,000 to charity to reach 10% of a £1 million taxable estate, the inclusion of an additional £500,000 pension fund would increase the baseline amount to £1.5 million, and the charitable gift required to secure the 36% rate would rise accordingly.

Continuity for the charitable sector

From a sector perspective, the Treasury’s confirmation provides important stability. Legacy income represents a substantial funding source for many charities, and any dilution of IHT incentives would have created uncertainty. Maintaining both the full exemption for charitable gifts and the 36% reduced rate preserves a powerful behavioural nudge within the tax system.

The message for Advisers: Planning estate and IHT

For Financial Advisers and estate planners, the message is nuanced but clear: charitable reliefs are structurally unchanged, but planning assumptions around pensions can no longer rely on historic IHT sheltering. Reviews of wills, pension nominations and legacy intentions will be essential ahead of 2027 implementation.

Charitable giving remains one of the most tax-efficient components of succession planning. However, once pensions enter the IHT net, the 10% hurdle may sit higher for many estates. In that sense, the rules may be unchanged, but the planning landscape has shifted.

The interaction between pension assets and IHT is a complex area of estate planning.
Speak to W1M to review how these changes affect you or your client.

FAQs

Will gifts to charity still be exempt from Inheritance Tax after April 2027?

Yes. HM Treasury has confirmed that the full IHT exemption for gifts to UK-registered charities will remain in place. The inclusion of pension funds in the taxable estate does not alter this relief.

What is the 36% reduced IHT rate and how does the 10% charitable threshold work?

If at least 10% of the net estate is left to charity, the IHT rate applied to the remaining taxable estate reduces from 40% to 36%. The mechanism is unchanged. However, from April 2027, pension assets will increase the baseline amount, meaning a larger absolute sum to charity is needed to qualify for the reduced rate.

My client has a large pension pot. How does this new IHT rule change their estate plan?

Once pensions form part of the taxable estate, a client who previously needed to leave, say, £100,000 to charity to meet the 10% threshold may now need to leave significantly more. We recommend reviewing all legacy planning, including pension nominations, will provisions, and charitable bequest intentions.

Should financial advisers be speaking to clients about pension IHT changes now, ahead of 2027?

Absolutely. The legislative changes are not yet final but draft legislation has been published and the direction of travel is clear. Reviews of wills, pension nominations, expression of wishes, and legacy charity intentions should begin now to avoid rushed decisions closer to the implementation date.