The 67% Problem
From April 2027, unused pension funds will be subject to Inheritance Tax—creating effective tax rates of up to 67% for beneficiaries.
Double taxation on inherited pensions
From April 2027, when a pension holder dies, their unused pension funds will be subject to 40% Inheritance Tax regardless of age at death. Beneficiaries then pay income tax when they draw it down. The combined effect can be devastating.
Key planning dates
Spreading drawdown over multiple tax years and building BPR qualification requires planning ahead. Here are the key dates advisers should be aware of.
Why start now? Spreading drawdown across multiple tax years optimises income tax bands. EIS investments need 2 years to qualify for Business Property Relief. The earlier you start, the more flexibility you have.
What's changing in April 2027
Pensions pass outside the estate, with beneficiaries only paying income tax when they draw down.
Pensions become part of the estate for IHT, then beneficiaries also pay income tax—double taxation.
Spousal transfers remain exempt. Rules apply to deaths on or after 6 April 2027.
How EIS can help
By drawing down pension funds and investing in EIS-qualifying companies, clients can potentially remove assets from both the pension IHT regime and their taxable estate—while receiving income tax relief on the investment.
Is this strategy suitable?
This is an advanced planning scenario that forms part of a broader estate planning conversation.
- You need access to capital within 10 years
- You cannot afford to lose some or all of the capital invested
- Your estate is already below the IHT threshold
- You are passing wealth to a spouse (spousal exemption applies)
- You are not a sophisticated or high net worth investor
- You have a low risk tolerance
- Capital loss: EIS investments are high-risk and may result in total loss of capital
- Illiquidity: No secondary market exists; you cannot sell when you want
- Legislative change: EIS, BPR and IHT rules may change in future
- No FSCS protection: EIS investments are not covered by FSCS, though loss relief may be available
- Long holding period: Typical hold is 7-10 years; early exit is unlikely
Model your client's scenario
Defaults to an additional rate taxpayer with a £500,000 pension — matching the 67% scenario above. Adjust the pension value to match your client, and expand “Adjust assumptions” to fine-tune tax rates.
Adjust assumptions
This model applies a single rate. In practice, large drawdowns may span multiple tax bands. For amounts over £50,000, consider checking the precise impact with a tax adviser.
Income tax rate when beneficiary draws down the inherited pension. Same single-rate simplification applies.
£331,250 of £331,250 net proceeds invested in EIS
How it works — step by step
£125,000 tax-free + £375,000 taxable
Net cash after tax: £331,250
Cash retained: £0
Pension IHT charge avoided
Your client's position today
£99,375 cash + £331,250 EIS shares
Illustrative: EIS returns 1×
£430,625
+£265,625 vs Do Nothing
Returns not guaranteed. BPR requires 2+ yrs, £2.5m cap.
Illustrative: total loss
£203,719
+£38,719 vs Do Nothing
Assumes loss relief claimed while alive. Illustrative only.
Do Nothing (post-April 2027)
£165,000
67% of pension lost to tax
40% IHT + 45% income tax on remainder.
At 0.20x, the EIS strategy would match the Do Nothing outcome on these illustrative figures. That represents less than half the capital invested.
Full comparison: Do Nothing vs EIS Strategy vs Total Loss
| Item | Do Nothing | EIS at 1× | EIS Fails |
|---|---|---|---|
| Pension pot | £500,000 | £500,000 | £500,000 |
| Pension IHT (40%) | −£200,000 | £0 | £0 |
| Beneficiary income tax | −£135,000 | £0 | £0 |
| Client income tax on drawdown | — | −£168,750 | −£168,750 |
| EIS relief (30%) | — | +£99,375 | +£99,375 |
| Cash retained | — | £99,375 | £99,375 |
| EIS shares (BPR exempt) | — | +£331,250 | £0 |
| Loss relief (s.131) | — | — | +£104,344 |
| Net to beneficiaries | £165,000 | £430,625 | £203,719 |
| Difference vs Do Nothing | — | +£265,625 | +£38,719 |
Want to discuss this with our distribution team? We can help you explore pension IHT planning for your clients.
Key assumptions: 25% tax-free lump sum (capped at £268,275), 30% EIS income tax relief, 40% IHT rate from April 2027, 100% BPR on EIS held 2+ years (within £2.5m cap). Cash retained remains in the client's estate and may be subject to IHT depending on nil-rate bands, spouse exemption, and other reliefs. This model shows pension-specific IHT mitigation, not complete estate planning.
Important: This calculator is for illustrative purposes only and does not constitute financial, tax or investment advice. Tax treatment depends on individual circumstances and may change. Tax reliefs depend on investee companies maintaining EIS qualifying status. EIS investments are illiquid, not protected by the FSCS, and capital is at risk. Past performance is not a guide to future performance.
Download the White Paper
Get our detailed guide on pension IHT planning with EIS, including case studies and implementation considerations.
Watch: Pulling All The Levers
Join us for an in-depth look at how EIS can help clients navigate the upcoming pension IHT changes, with case studies and practical implementation guidance.
45 minutes • Recorded January 2026
Free registration required. Suitable for financial advisers.
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