Pensions in Your Estate from April 2027: Where a FIC May Fit

If you have been building a pension partly to hand on to your family, the rules are changing. For deaths on or after 6 April 2027, most unused pension funds and death benefits will count towards the estate for inheritance tax. This is enacted law in Finance Act 2026, not a proposal. It is one reason some families are looking again at how they hold and pass on wealth, including through a Family Investment Company (FIC).

What is changing

Until now, a defined contribution pension has generally sat outside the estate. From 6 April 2027 most unused funds and death benefits will be brought in, and the personal representatives of the estate will be responsible for reporting and paying the tax.

Two exclusions matter. Death-in-service benefits and dependants' scheme pensions are left out. Schemes differ, so ask your provider or pension adviser how yours will be treated.

The headline rate stays at 40% on the estate above the available nil-rate bands. The nil-rate band is £325,000 and the residence nil-rate band is up to £175,000 when the home passes to direct descendants. Both are frozen until the end of 2030/31, and the residence band tapers away for estates above £2m.

The effect can be large. An estate that was below the thresholds may now be above them, and one that was already above may pay 40% on more.

What a FIC cannot do

It is worth being plain about this. A FIC does not hold your pension and does not shelter it. The pension stays a separate arrangement, and a pension adviser is the right person to guide you on how it is used, drawn and nominated.

A FIC deals with the assets you hold outside the pension. The question is what to do with those now that the pension is part of the picture.

Why more people are asking

Three things have come together.

1. More estates will meet inheritance tax. With pensions counted and the bands frozen, more families sit in the 40% range.
2. The usual order of spending is being questioned. Many people planned to use other assets first and leave the pension to pass on. With that advantage reduced, some will draw on the pension earlier. That has income tax consequences, so it is a matter for your pension adviser and your own figures.
3. Spare capital deserves a second look. If you have money or investments outside the pension that you will not need, you can think about where the future growth on them should build up.

This is where a FIC can come in. The parents lend money to the company or subscribe for shares. Their shares can carry a fixed value and the votes, while growth shares go to the children or to a trust. Future growth then builds outside the parents' estate. Our post on freezer shares and growth shares explains the idea in detail.

What it demands of you

A FIC takes planning, patience and a comfortable cushion.

• Seven years. A cash gift to adult children, who then take up shares, is a potentially exempt transfer. It leaves the estate if the donor survives seven years, with taper relief on any tax between years three and seven.
• A loan stays in your estate. If you fund the company by loan, the debt owed to you remains your asset for inheritance tax until it is repaid or given away. Repayments can give you an income.
• Costs and administration. A limited company files public accounts, keeps records, submits tax returns and pays corporation tax on its own profits.
• Enough left for you. A FIC is for money you will not need. It is no place for funds you might need for care or living costs.

Who it suits and who it does not

A FIC tends to suit families with comfortably surplus money outside their pensions, such as the proceeds of a business sale, an investment portfolio or let property. It rarely suits someone whose wealth is mostly a pension and a home. In that case other steps usually come first, such as gifting from surplus income, using exemptions, and revisiting nominations and your will. We say so when a FIC is not the right answer.

Questions to put to your advisers

Before you decide anything, ask:

• Your pension adviser: how will my scheme's death benefits be treated from April 2027, who is named to receive them, and what would drawing more now cost me in income tax?
• Your solicitor: do my will and any trusts still do what I want, now the pension may form part of my estate?
• Our team: if I have surplus capital outside the pension, would a FIC, a trust, simple gifts or no action serve my family best, and what should I keep for myself?

A sensible order of steps

1. Gather the values of your pension and your other assets in one place.
2. Take pension advice on how the funds should be used and nominated.
3. Look at the inheritance tax position with and without the pension.
4. Decide how much is genuinely surplus, then test whether a FIC, a trust, gifts or no action fits best.

Our pages on inheritance tax planning and wealth planning give more background.

This article is general information, not advice. If you would like a view on your own position, book a call with our specialist team. Our advice is prepared by our specialist team and reviewed by a Chartered Tax Adviser, and your first call is free. Please also speak to your pension adviser before acting.

To explore Family Investment Companies further, visit our specialist practice, Family Investment Company.