Worked estates
Inheritance tax on a £500,000 estate with a pension
For a single or divorced parent, half a million pounds is the line. A modest pension that used to sit beside the estate now counts inside it.
Inheritance tax on a death from 6 April 2027
£0
The pension does not change the bill for this estate.
| Before 6/4/27 | From 6/4/27 | |
|---|---|---|
| Estate counted | £400,000 | £500,000 |
| Tax-free bands used | £500,000 | £500,000 |
| Inheritance tax at 40.0 % | £0 | £0 |
| of which on the pension | £0 | £0 |
| Heirs’ income tax on the pension | £37,892 | £37,892 |
| Each of 2 heirs keeps | £231,054 | £231,054 |
Of each £100 of pension passed on, tax takes £38 from April 2027, against £38 before.
Residence band £175,000. Estimate only, not advice.
A single, divorced or unmarried person who leaves a home to children or grandchildren can pass on up to £500,000 free of inheritance tax: the nil-rate band of £325,000 plus the residence nil-rate band of £175,000, both frozen until 5 April 2031. Above that line the rate is 40 %. Take a parent with a £300,000 house and £100,000 of savings. On a death before 6 April 2027 the estate counted is £400,000, comfortably below the line, and the £100,000 pension sits outside it. From that date the pension joins the estate, which becomes £500,000: exactly on the threshold, so the tax is nil but no room is left. Any growth in the house, the savings or the pot is now taxed. With a pension of £150,000 instead, the same parent's estate owes £20,000, of which £5,455 is charged on the pension itself. The children's income tax on the pension, when the parent dies at 75 or over, comes on top.
Law read and sums checked by Radif Partners · Editorial policy · How the tax is worked out
Where the half-million line comes from
Two allowances add up to it. Everyone has the nil-rate band of £325,000. On top, the residence nil-rate band of up to £175,000 applies when a home the person lived in, or a share of it, is inherited by children, grandchildren, step-children or their spouses. GOV.UK sets the rate above both at 40 %. A single parent cannot borrow anyone else's bands: those of a former spouse are lost on divorce and an unmarried partner has none to pass on. So for this household the figure is fixed at £500,000 until 5 April 2031.
The pension that tips it over
Before 6 April 2027, most pension pots paid out at the scheme's discretion stayed outside the estate. Section 66 of the Finance Act 2026 ends that: the unused pot is treated as the member's property immediately before death. The table keeps the house and savings of the example and changes only the pot.
| Unused pension | Estate from April 2027 | Inheritance tax | Charged on the pension | Average rate |
|---|---|---|---|---|
| £50,000 | £450,000 | £0 | £0 | 0.0 % |
| £100,000 | £500,000 | £0 | £0 | 0.0 % |
| £150,000 | £550,000 | £20,000 | £5,455 | 3.6 % |
| £200,000 | £600,000 | £40,000 | £13,333 | 6.7 % |
| £300,000 | £700,000 | £80,000 | £34,286 | 11.4 % |
Up to £100,000 of pension the estate still fits. Past it, each additional £10,000 in the pot adds £4,000 of tax, and that tax is shared between the house, the savings and the pension in proportion to their value. A parent who expected the children to receive everything intact now has a bill that grows with every good year in the markets.
Reading the calculator for this household
The tool above opens on the example: single, £300,000 home to descendants, £100,000 saved, £100,000 in the pension. The ledger below uses the same inputs, a death at 78 and two children who each earn £45,000.
| Death before 6 April 2027 | Death from 6 April 2027 | |
|---|---|---|
| Estate counted for inheritance tax | £400,000 | £500,000 |
| Nil-rate band and residence band used | £500,000 | £500,000 |
| Inheritance tax | £0 | £0 |
| of which on the pension | £0 | £0 |
| Income tax paid by the heirs on the pension | £37,892 | £37,892 |
| Each of 2 heirs keeps | £231,054 | £231,054 |
No inheritance tax is due either way, yet the children still pay £37,892 of income tax between them on the pension, because the parent died at 75 or over and the money is taxed as their income when drawn. Change the age at death to see the income tax disappear on a death before 75.
Points that move the result
- Leaving the home to a nephew, a niece or a friend removes the residence band: the page on estates with no children shows the effect.
- A mortgage or other debts come off the estate before the threshold is compared.
- Gifts made in the 7 years before death use the nil-rate band first.
The residence band guide covers downsizing and the cap at the home's value, and the £1 million page follows a widowed parent whose limit is twice this one. The figures are illustrations; executors, a solicitor or a regulated adviser check a real estate.