The Autumn Budget 2026: What it means for your estate and pension

• No flat rate 10% levy: the highly speculated flat 10% tax on estates did not appear; the standard IHT rate remains at 40%.
• Frozen thresholds unchanged: the standard nil rate band (£325,000) and residence nil rate band (£175,000) remain frozen until April 2031.
• Gifting rules intact: no lifetime gifting caps were introduced, and the valuable “gifts out of normal surplus income” rules (which allow regular gifts from surplus income to be made free of IHT) remain unchanged.

As a general reminder, most unused pension funds and pension death benefits will be brought within a deceased’s estate for IHT purposes from 6 April 2027. If you have not yet reviewed your pension arrangements and overall estate plan with this change in mind, now is the time to do so.

To help ease some of the practical and administrative challenges this change will create, two important technical revisions were announced:

1. Payment of IHT before probate: from 6 April 2027, personal representatives will be able to direct pension scheme administrators to pay IHT directly to HMRC from the pension funds before probate is granted.
   When pensions enter the IHT net in 2027, there were widespread concerns that families would face a serious cash flow problem – trapped in a position where they could not access pension funds to pay the tax bill required to secure probate. This vital procedural update removes that hurdle, allowing the tax to be settled directly by the pension provider early in the process.
2. Removal of the 2-year rule: for payments made on or after 28 October 2026, death benefits will no longer become automatically taxable as income solely because they take longer than 2 years to distribute.
   Previously, where a pension member died before the age of 75, beneficiaries needed to receive the funds within 2 years, or face an unexpected income tax bill. Following the Budget, these payouts will now remain tax-free regardless of how long the administration takes, provided they fall within the member’s available Lump Sum and Death Benefit Allowance (LSDBA).This is a welcome change that eliminates an unfair tax trap for families dealing with complex or delayed estates.

A hidden sting for business owners and farmers is HMRC’s confirmed position that business property relief (BPR) and agricultural property relief (APR) will not apply to pension assets. Historically, this was irrelevant because pensions sat entirely outside the taxable estate. However, once they enter the IHT net in April 2027, this lack of relief creates a significant and unfair disadvantage – particularly for those holding commercial property or agricultural land within a self-invested personal pension (SIPP) or a small self-administered scheme (SSAS).

Many business owners use these structures to hold trading premises or agricultural land. Owning that same property personally, or through a trading company could qualify for up to 100% BPR or APR (subject to the new combined £2.5 million lifetime cap). However, because a pension member does not legally own the underlying asset held within the pension, that property will instead be treated as “notional pension property” on death and exposed to a full 40% IHT charge with no access to BPR or APR.

For affected clients, this is an issue that requires urgent attention ahead of April 2027. If you hold commercial property or land within a pension arrangement, we strongly encourage you to seek advice on your options now.

Currently, leaving at least 10% of your “baseline estate” to charity reduces the rate of IHT payable from 40% to 36%. When pensions enter the IHT net from April 2027, there were fears that the addition of pension wealth would distort the calculations, potentially forcing people to significantly increase their charitable donations just to maintain the reduced rate they had planned for.

Fortunately, new rules will allow personal representatives to treat pension funds separately when testing whether the 10% threshold has been met – namely choosing whether the pension property sits within the estate’s “general component” or is treated as a separate component. This means that existing wills and testators’ charitable intentions should not be inadvertently undermined by the pension changes.

That said, if your current will includes charitable giving, we highly recommend that you review it now alongside your pension arrangements. The interaction between pension assets, charitable legacies and IHT can be complex and it is always worth ensuring your wishes can still be carried out exactly as you intend.

With effect from 28 October 2026, the government has introduced strict new anti-avoidance rules targeting liabilities connected with trust property. The rules are aimed at artificial arrangements where trust debts were used to reduce the trust’s overall value for IHT – particularly where the debt originated from a beneficiary’s own estate. Going forward, trustee-incurred liabilities will be treated in a similar way to personal liabilities, preventing deductions that HMRC considers to be contrived or unintended.

If you currently use trusts as part of your wealth or succession planning, it is worth reviewing existing arrangements to ensure they remain fully effective and compliant in light of these changes.

Flora is a Senior Associate and full member of STEP, advising individuals, families and trustees across a broad range of matters including wills, trusts, tax and succession planning, the administration of complex estates and the preparation and registration of lasting powers of attorney.