Unused Pensions in Estate for IHT and Losing Residence Nil Rate Band
Published / Last Updated on 27/02/2026
We all have inheritance tax (IHT) nil rate band allowances where no IHT is payable:
- Nil Rate Band (NRB) - £325,000
- Residence Nil Rate Band (RNRB) - £175,000 (if you are or have recently sold your main residence)
- Total NRB per Individual £500,000.
For married spouses and civil partners, unused NRB and RNRB on 1st death can be passed to the survivor on 2nd death meaning up to £1,000,000 is available in NRBs on 2nd death.
Loss of RNRB
Often forgotten or rarely mentioned is the fact for estates worth over £2m, for every £2 over £2m, the RNRB is reduced by £1.
- E.g. Estate worth £2.1m, that is £100,000 over and on a 2:1 taper, this means the RNRB is reduced by £50,000 to £125,000.
- If the estate is worth £2.3m or more, the RNRB is lost entirely.
For most people, they are not affected by any loss in RNRB but certainly those with higher value estates, in particularly in London, where it is commonplace for properties alone to be worth £1m,£2m+, it is more common.
According to HMRC, in 2022/23 some 3,600 estate were affected by a loss of RNRB on death.
Enter: Rachel Reeves and her infamous Budget
Unused pension funds are included in a deceased’s estate for IHT purposes from April 2027.
This means that those with larger pension funds on death (that previously were saving as loved ones could inherit IHT free) will now be caught and even worse, the unused pension fund value added to the estate which will mean some will then lose RNRB.
More IHT payable on pension funds and even more IHT because you have lost your RNRB.
It has been estimated that the number of estates that will be affected by losing RNRB will increase to over 16,000 estates per year by 2031 due to:
- NRB have been frozen until 2031.
- Pensions are included in the estate value from 2027.
At 16,000 estates per annum, that’s an extra 12,400 estates per annum. With a loss of £175,000 RNRB per estate, that equates to an additional £2.17billion or more estate taxable at 40%, that’s additional £868m IHT revenue every year, so will soon push to an extra £1bn a year.
Nice little 'stealth tax' move on the top of the £billions in additional IHT on pension funds anyway.
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