By Dylan Baker, IFA | Cameron James | June 2026
The rules around Inheritance Tax are changing, and for millions of families the impact will be significant.
From April 2027, defined contribution pensions, long considered one of the most effective tools for passing wealth to the next generation free of tax, will be brought inside the taxable estate.
For many families, this is not a minor adjustment. It is a fundamental shift that will increase their IHT liability overnight, without any change to their behaviour, their spending, or their intentions. People who deliberately left their pensions untouched because they were told it sat outside their estate will find the rules have changed around them.
The good news is that the same pension causing the problem can be used to solve it. A structured whole of life policy written into trust, funded by pension drawdown, can turn what was heading towards a 40% tax charge into a tax-free legacy worth more than the original fund. This article explains how.
The Pension Bombshell: What Is Changing in April 2027
For decades, Defined Contribution pensions have been one of the most powerful estate planning tools available. Money inside a pension sat outside your estate, free from Inheritance Tax, and could be passed to your beneficiaries intact. Many people have deliberately left their pensions untouched precisely because of this.
That changes in April 2027. Under the government's Autumn Budget 2024 reforms, unused pension funds will be counted as part of your taxable estate on death. For anyone with a substantial pension pot, this is a significant and sudden increase in their potential IHT liability. The clock is already ticking.
The current nil-rate band is £325,000 per person, with an additional residence nil-rate band of up to £175,000 where a main residence passes to direct descendants. Above those thresholds, IHT is charged at 40%. From April 2027, your pension fund sits on top of everything else in your estate when that calculation is made.
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The Strategy: Turning Your Pension into a Legacy Multiplier
Here is where it gets genuinely interesting. The very pension that is about to become a tax liability can be restructured into a highly tax-efficient legacy, if you act in advance of the change.
The approach works like this: rather than leaving your pension to sit inside your estate and face a 40% tax charge on death, you begin drawing it down in a controlled, tax-efficient manner, and use those drawdown proceeds to fund the premiums on a whole of life insurance policy written into trust.
Pension Drawdown
Begin drawing down pension income in a structured way. Within the personal allowance or at basic rate, the income tax cost is manageable, and far less than the 40% IHT charge your beneficiaries would otherwise face on that money.
Fund Whole of Life Premiums
The drawdown proceeds are used to pay premiums on a whole of life policy. Unlike term insurance, a whole of life policy has no expiry date. It pays out whenever you die, guaranteed, regardless of how long you live. This matters more than most people realise when it comes to IHT planning.
Write the Policy into Trust
Critically, the policy is written into an appropriate trust from day one. This means the payout sits entirely outside your estate. No IHT. No probate delays. No deductions. The trust ensures the proceeds reach your beneficiaries promptly and cleanly.
Beneficiaries Receive a Tax-Free Lump Sum
On your death, the trustees pay the sum assured directly to your beneficiaries, quickly and free of inheritance tax, often a multiple of what you paid in premiums. The pension, instead of being eroded by 40%, has become a legacy multiplier.
Why Whole of Life and Not a Term Policy
This distinction matters more than people realise. A term policy expires. If you outlive it, which many people do, the cover disappears, the premiums are gone, and your estate is fully exposed to IHT again. For IHT planning, that risk is simply unacceptable.
A whole of life policy pays out on death. Guaranteed. Whether that is next year or in thirty years. The insurer is contractually committed to covering your estate's IHT liability regardless of when it falls due. That is the only way to genuinely ring-fence a beneficiary's inheritance.
Because whole of life policies are priced on mortality assumptions rather than time alone, a relatively modest monthly premium can support a sum assured that significantly exceeds the total premiums paid. Your pension, which was heading towards a 40% tax charge, becomes the engine that funds a tax-free payout to your family worth considerably more.
Illustrative Example
The figures below are illustrative only. Actual premiums and sum assured will vary depending on age, health, and the level of cover required. The principle, however, is consistent: the sooner this is structured, the more favourable the terms typically are.
| Factor | Figure |
| Age at outset | 62 |
| Pension value (subject to IHT from April 2027) | £450,000 |
| Potential IHT liability on pension alone at 40% | £180,000 |
| Annual pension drawdown used to fund premiums | £12,000 per year |
| Whole of life sum assured (written into trust) | £500,000+ |
| IHT on policy payout to beneficiaries | £0 |
In this scenario, the family does not just cover the IHT liability. They receive a larger, fully tax-free lump sum than the pension was worth after tax. The pension, instead of being eroded by 40%, has become a legacy multiplier.
What About Other Estate Assets
The same principle applies beyond pensions. If you hold assets within your estate, for example ISAs, investment portfolios, or savings, that are likely to attract IHT, using the income or gains from those assets to fund whole of life premiums follows exactly the same logic.You are redirecting money that would otherwise be taxed at 40% into a trust-held policy that pays out completely free of tax. For clients with larger estates, this can be layered: pension drawdown funding part of the premiums, investment income funding another part, building a combined structure that systematically addresses the total IHT exposure.
Trusts: Why They Cannot Be Ignored
Writing the policy into trust is not optional. Without it, the payout simply falls into your estate and faces the same 40% charge you were trying to avoid. The trust ensures the proceeds bypass your estate entirely, reach your beneficiaries promptly, and do so without being tied up in probate.
There are different trust structures available, including discretionary, absolute, and flexible trusts, and the right choice depends on your personal circumstances, who your beneficiaries are, and how much flexibility you want to retain. This is exactly the kind of decision that needs qualified estate planning advice.
The Three HMRC Rules: Plain English
When you put a whole of life policy into trust, you are making a legal gift. HMRC has three rules that determine whether that gift is treated as genuine. Understanding them is not optional for anyone doing this properly.
| Rule | Plain English | What It Means in Practice |
| Rule 1 | Do not benefit from what you give away | You cannot be a beneficiary of the trust you set up. The trust must be properly drafted and entirely for the benefit of others. Get this right and the policy payout bypasses your estate entirely. |
| Rule 2 | Give away £3,000 a year tax-free | Every adult can gift £3,000 per year free of IHT. Couples get £6,000. Unused allowance carries forward one year, so up to £12,000 may be available immediately. Premium payments count as gifts. |
| Rule 3 | Regular income gifts are IHT-free with no limit | If you regularly give money from income (not savings), and doing so does not affect your standard of living, those gifts are immediately exempt from IHT. No limit. No seven-year clock. This is the most powerful and least-known rule in estate planning. |
Do Not Benefit From Something You Have Given Away
If you give something away but still benefit from it, HMRC does not consider it a real gift. It stays in your estate and gets taxed. With a whole of life policy in trust, this means one thing above all else: you cannot be a beneficiary of the trust you set up. The moment you retain any personal benefit from it, the protection disappears and the payout falls back into your taxable estate. The trust must be properly drafted, independently controlled, and entirely for the benefit of others.
The Annual Gift Exemption
Every adult can gift up to £3,000 per year with no inheritance tax consequences, under the annual gift exemption. Couples can gift £6,000 between them. If you did not use last year's allowance, you can carry it forward once, making up to £12,000 available immediately. Premium payments on your trust policy count as gifts, so this allowance reduces your taxable estate from day one. Most people never use it.
Gifts Out of Income
This is the most powerful and least-known rule in estate planning. Under the gifts out of income exemption, if you regularly give money away from your income, not your savings, not your investments, your income, and doing so does not affect your standard of living, those gifts are completely exempt from inheritance tax. No limit. No seven-year clock. Immediately exempt, every time.
When you draw income from your pension and use it to pay your whole of life premiums each month, those payments do not just reduce your pension. They leave your estate entirely, free of tax, right away. The pension that was heading for a 40% charge on death becomes the engine that funds a tax-free legacy.The one condition: it must be set up properly, run consistently, and documented from day one. HMRC will want to see evidence that it was always the intention. Cameron James handles this alongside a qualified accountant where relevant, but it must be done at the start, not retrospectively.
DYLAN BAKER | IFA, Cameron James
“The families I speak to who are most affected by the April 2027 changes are often the ones who did everything right. They built a pension, left it untouched because they were told it sat outside their estate, and now find that the rules have changed around them without any action on their part. That is genuinely difficult to absorb. What I want them to understand is that the same pension causing the problem can be used to solve it. A structured whole of life policy, written into trust and funded by pension drawdown, can turn what was heading towards a 40% tax charge into a tax-free legacy worth more than the original fund. The window to do this at the most favourable terms is right now. Every year of delay costs more than most people realise.”
Dylan Baker | IFA, Cameron James | cjfinance.co.uk
The Window Is Open. It Will Not Be Forever.
Right now, you have something that becomes harder to secure with every passing year: insurability. The premiums on a whole of life policy are based on your age and health at the point you apply. Every year you wait, the cost goes up. Every change in health, however minor, can affect the terms you are offered. The policy you can put in place today, at today's rates, is the cheapest version of this protection you will ever be able to access.
The pension changes arrive in April 2027. That sounds like a comfortable distance. It is not. Trust structures need to be drafted. Policies need to be underwritten. Drawdown strategies need to be aligned with your wider income and tax position. This is not something that gets pulled together in a week, and it is not something that should be rushed.
The families who come out of the 2027 changes with their estates intact will be the ones who made a decision in the months before, not the ones who meant to get around to it.
CAMERON JAMES | UK & EXPAT FINANCIAL PLANNING
Find out where your estate stands before April 2027.
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Frequently Asked Questions
Under the government's Autumn Budget 2024 proposals, yes. From April 2027, unused defined contribution pension funds will be counted as part of your taxable estate on death and subject to inheritance tax at 40% above the nil-rate band. This is a fundamental change from the current position, where pension funds generally sit outside the estate. The legislation is subject to final parliamentary approval. We recommend taking advice now while planning options are at their most favourable.
A whole of life policy written into trust sits outside your estate from the moment it is established. When you die, the trustees pay the sum assured directly to your beneficiaries without it passing through your estate. There is no IHT on the payout, no probate delay, and no deduction from the sum assured. The key is that you cannot be a beneficiary of the trust yourself. If the trust is properly drafted and you retain no personal benefit, the payout is entirely free of inheritance tax.
The gifts out of income exemption is an HMRC rule that allows you to make regular gifts from income, free of IHT, with no limit and no seven-year clock, provided the gifts are made from income rather than capital and do not affect your standard of living. When you draw income from your pension and use it to pay whole of life premiums, those payments can qualify for this exemption, making them immediately outside your estate. The arrangement must be documented from the start.
Whether pension drawdown is the right approach depends on your income tax position in the years of drawdown, the size of your IHT exposure, your age and health, and your wider financial plan. In many cases, drawing down within the personal allowance or at basic rate, rather than facing a 40% IHT charge on death, produces a significantly better outcome for your family. A Cameron James adviser can model this for your specific circumstances.
Book a call to find out.
The main options are discretionary, absolute, and flexible trusts. Each has different implications for who can benefit, how much flexibility the settlor retains, and how the trust is taxed. For most IHT planning purposes, a discretionary or flexible trust is used because it allows the trustees to respond to changing family circumstances. The right choice depends on your specific beneficiaries, your family structure, and your planning objectives. This is one of the decisions that most benefits from qualified advice.
Whole of life policies are underwritten at the point of application. That means the insurer assesses your age and health at that moment and fixes the premium terms accordingly. If your health deteriorates after the policy is in force, the policy terms do not change. If you wait and your health changes before you apply, the premiums will be higher or the cover may be restricted. This is the single most important practical reason to act sooner rather than later.
Cameron James works alongside qualified accountants where relevant to ensure that the gifts out of income arrangement is documented correctly from the outset. HMRC requires evidence of regularity, income source, and impact on standard of living. This documentation must be created at the start of the arrangement, not retrospectively. Our advisers coordinate this as part of the overall planning structure.
Contact us to discuss your position.
Further Reading
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| DISCLAIMER This article is for informational purposes only and does not constitute financial, tax, or legal advice. The illustrative example is for illustration purposes only. Actual premiums, sum assured, and tax treatment will depend on individual circumstances including age, health, estate composition, and applicable legislation at the time of arrangement. Tax legislation is subject to change. Always seek independent specialist advice before making any financial or estate planning decisions. The gifts out of income exemption (Rule 3) requires careful documentation from the outset. HMRC will assess claims based on evidence of regularity, income source, and impact on standard of living. Cameron James works alongside qualified accountants where relevant to document these arrangements correctly. Cameron James is authorised and regulated by the Financial Conduct Authority. Advisers hold individual regulatory authorisations appropriate to the jurisdictions in which they advise. |