Rethinking Pension Strategy Amid Policy Shifts
Executive Summary
Two seismic policy shifts are converging to reshape wealth transfer for high-net-worth individuals in the UK. From April 2027, unused pension funds will become subject to Inheritance Tax for the first time in a generation. At the same time, the Enterprise Investment Scheme (EIS) retains its powerful Business Relief exemption, making EIS-qualifying shares one of the very few routes still capable of passing assets to heirs with minimal IHT exposure.
This thought piece explores a strategy that is gaining traction among advisers and their clients: crystallising pension wealth early via drawdown, reinvesting the proceeds into EIS-qualifying companies, reclaiming 30% income tax relief on the way in, and ultimately passing those EIS holdings with materially reduced IHT exposure following the two-year Business Relief qualification period.
The potential tax differential is significant. Done well, the combined effect can reduce the effective tax burden on wealth transfer from a potential 67% (IHT plus income tax on pension drawdown by beneficiaries post-2027) to significantly lower, while simultaneously generating the 30% income tax relief that EIS is known for.
Important: EIS investments carry substantial risk. These are stakes in early-stage, unquoted companies. Capital is at risk and liquidity is limited. This piece is for information and discussion purposes only and does not constitute personal investment or tax advice. Always seek qualified independent advice before acting.
Part 1: The Changing Pension Landscape
How Pensions Were Used For Estate Planning
For decades, defined contribution pension funds, SIPPs, personal pensions, workplace schemes, sat outside the IHT estate. This made them the planning tool of choice for wealth transfer: individuals would spend other assets in retirement and preserve the pension pot as a near-tax-free bequest. Under existing rules, death before age 75 allows pension death benefits to pass to nominated beneficiaries completely free of both IHT and income tax. Death after 75 still means the pot sits outside the IHT estate, but beneficiaries pay income tax at their marginal rate when they draw down. For a higher-rate taxpayer beneficiary, that is 40%; for an additional-rate taxpayer, 45%.
The April 2027 Change: Pensions Enter The IHT Net
The Autumn Budget 2024 announced, and the draft Finance Bill 2025-26 has confirmed, that from 6 April 2027, most unused pension funds and pension death benefits will be brought within the deceased’s estate for IHT purposes. This is the most fundamental change to pension taxation in a generation. The practical consequence for non-spouse beneficiaries who are higher or additional-rate taxpayers is the potential for double taxation:
- 40% IHT applied to the pension fund as part of the estate
- Then income tax (up to 45%) applied by the beneficiary on every pound drawn down
The combined effective rate for a non-spouse additional-rate taxpayer beneficiary can approach c.67% in certain circumstances, though in practice effective rates vary materially depending on the beneficiary’s own tax position, the timing of drawdown, and whether phased withdrawals are used.
This does not mean pensions lose their value as planning tools. For many investors they will remain highly efficient vehicles for long-term tax-deferred compounding and retirement income planning, particularly where assets are destined for a surviving spouse, or where the pension will be substantially drawn during the member’s lifetime. The question post-2027 is not whether pensions are useful, but whether they remain the optimal vehicle for the portion of wealth specifically intended for intergenerational transfer to non-exempt beneficiaries.
HMRC estimates approximately 10,500 estates per year will be caught by this change. For those with significant pension wealth earmarked for children or other beneficiaries, the case for reviewing the overall capital structure has rarely been more compelling.
Context: Until April 2027, the dominant retirement drawdown strategy was often: spend savings first, draw ISAs next, preserve pension last. Post-2027, for larger estates, that calculus is fundamentally reversed.
Part 2: EIS, Business Relief, and the IHT Advantage
What The Enterprise Investment Scheme Offers
EIS was designed to channel private capital into early-stage, high-growth UK businesses. In return, qualifying investors access a package of tax reliefs that is unmatched elsewhere in the UK tax system:
- 30% income tax relief on investments up to £1 million per year (rising to £2 million if at least £1 million is invested in Knowledge Intensive Companies)
- CGT-free growth on disposal after three years
- CGT deferral, gains made up to three years before or one year after investment can be deferred until the EIS shares are sold
- Loss relief, if a company fails, net losses can be offset against income or capital gains
- Business Relief (BR) for IHT purposes, the subject of this piece
Business Relief: The IHT Shield
EIS-qualifying shares are unquoted shares in trading companies. As such, they qualify for Business Relief under section 105 of the Inheritance Tax Act 1984. Provided the shares have been held for at least two years and are still held at the time of death, they attract Business Relief, reducing the IHT liability on those shares significantly.
The April 2026 Rule Change: Caps and Rates
Pre-existing unlimited 100% Business Relief has been modified from 6 April 2026 following the Autumn Budget 2024 and Spring Statement 2026. The new regime is:
- First £2.5 million of combined business and agricultural property: 100% Business Relief (zero effective IHT rate)
- Value above £2.5 million: 50% Business Relief, producing an effective IHT rate of 20% on the excess
- The £2.5 million allowance is transferable between spouses if unused
Crucially, EIS private company shares retain their eligibility for 100% relief within this cap. AIM-listed shares, by contrast, have been downgraded to a flat 50% relief (effective 20% IHT) without any 100% threshold, a significant divergence that makes EIS substantially more attractive than AIM for IHT planning at scale.
Key Point: EIS shares held for two years qualify for 100% Business Relief on the first £2.5m (per individual), and an effective 20% IHT rate above that, versus the 40% IHT that will apply to pensions from April 2027.
Part 3: Repositioning Pension Capital
The Planning Approach
The approach involves drawing down pension funds over time, paying the income tax due on withdrawal, and deploying the net proceeds into EIS-qualifying companies. Once those shares have been held for two years, they attract Business Relief, substantially reducing or eliminating the IHT exposure on that capital. The 30% EIS income tax relief on the amount invested then partially or substantially offsets the income tax paid on drawdown, depending on individual circumstances and marginal rates.
The Spousal Exemption: Where This Planning Becomes Most Relevant
A critical starting point for any estate planning discussion: transfers between spouses and civil partners are exempt from IHT. Where assets, including pension funds, pass to a surviving spouse on first death, no IHT arises regardless of value. The surviving spouse also inherits the deceased’s unused nil-rate band and, where applicable, unused Business Relief allowance.
The planning considerations discussed in this piece therefore become most acute on second death, when assets ultimately pass to children or other beneficiaries who do not benefit from the spousal exemption. Advisers working with couples should model the combined estate and the anticipated tax position on second death, not merely the first. For unmarried individuals, or those with estates structured to pass assets directly to children or other non-exempt beneficiaries, these considerations apply from the outset.
Note for Advisers: Inter-spousal transfers remain exempt from IHT. The planning complexity discussed here applies most acutely to second-death scenarios and to individuals with estates structured to pass assets directly to children or other non-exempt beneficiaries.
Why Phased Drawdown Rather Than Full Crystallisation
A question advisers and clients frequently raise: if repositioning pension wealth into EIS is beneficial, why not crystallise everything at once?. In most cases, a phased approach across multiple tax years is substantially more efficient. The reasons are several:
- Income tax banding: Drawing the full pension in a single year concentrates income into the highest marginal rate bands. Spreading drawdown across years allows portions of each year’s income to be absorbed by lower bands, materially reducing the overall income tax cost.
- Personal allowance tapering: The personal allowance (£12,570, frozen until 2028) is tapered for those with adjusted net income above £100,000, reducing by £1 for every £2 of income above that threshold, disappearing entirely above £125,140. A large single-year drawdown pushing income well above £100,000 creates an effective 60% income tax rate on the tapered band. Phased drawdown can preserve some or all of the personal allowance in each tax year, a meaningful cash-flow benefit.
- EIS relief matching: The 30% EIS income tax relief is claimed against the investor’s income tax bill in the year of investment or carried back one year. Aligning EIS subscriptions with each year’s pension drawdown income creates the most efficient offset, a relief that would be partially wasted if drawdown income and EIS investment were mismatched across tax years.
- MPAA management: Triggering flexible drawdown activates the Money Purchase Annual Allowance, reducing future pension contribution capacity to £10,000 per year. For those still contributing to a pension, careful timing of the first flexible access, ideally after ceasing employment, avoids unnecessarily constraining future allowance.
- The two-year Business Relief clock: Each tranche of EIS investment begins its own two-year holding period from the date shares are issued. A phased approach means earlier tranches reach Business Relief eligibility sooner, useful where health considerations or estate timelines make early qualification a priority.
A Worked Illustration
Consider an individual (aged 68, additional-rate taxpayer) with a £500,000 SIPP. Under the post-April 2027 rules, if left unspent at death, the pension fund falls within the IHT estate at 40%, and the beneficiary (an additional-rate taxpayer child) then pays income tax at 45% on every pound drawn down. In practice, drawdown would often be staged across multiple tax years to manage income tax bands and preserve personal allowances. The illustration below assumes full drawdown in a single period for comparison purposes only.
| Do Nothing (Post-2027) | Repositioning into EIS | |
| Income Tax on Drawdown | Paid by beneficiary at 45% | £225,000 (45% rate, simplified) |
| Net After Income Tax | None | £275,000 available to invest |
| EIS Income Tax Relief (30%) | – | +£82,500 tax relief reclaimed |
| Effective Net Cost of EIS | – | -£192,500 |
| IHT on Pension (40%) | £200,000 | Not applicable (pension drawn) |
| IHT on EIS shares at Death | – | £0 (shares attracting Business Relief, within £2.5m cap) |
| Beneficiary Receives (est.) | -£165,000 | £275,000 (plus growth, pre-costs) |
| Effective Combined Tax Rate | ~67% | ~45% (before EIS growth) |
Note: This illustration is simplified and uses rounded figures for comparison purposes only. It does not model the meaningful additional benefit of phased drawdown, which in practice would typically reduce the average income tax rate and improve overall outcomes. Individual results depend on marginal tax rates, personal allowance position and tapering, the timing of drawdown, the two-year Business Relief holding period, MPAA implications, and the performance of underlying EIS companies. It does not constitute advice.
Beneficiary Timing and Income Tax on Inherited Pensions
Under current rules, the income tax treatment of an inherited pension fund depends on whether the original member died before or after age 75. Death before 75 allows beneficiaries to draw down the inherited fund entirely free of income tax. Death after 75 means beneficiaries pay income tax at their own marginal rate on every withdrawal.
Post-April 2027, once IHT is also applied at the estate level before the pension reaches the beneficiary, the order and timing of subsequent drawdown becomes a further planning variable. Beneficiaries with capacity within lower tax bands, or who can time drawdown to straddle tax years, will face a meaningfully lower combined rate than those already at the additional rate. This reinforces the value of considering the full generational picture, and the beneficiaries’ own tax positions, when structuring pension wealth.
Part 4: Risk, Legislation, and What to Watch
Investment Risk Cannot Be Ignored
EIS investments are stakes in early-stage, unquoted businesses. This is inherently high-risk capital. Some companies will fail ; diversification across a portfolio of EIS companies is widely considered best practice. The tax benefits provide a meaningful buffer, 30% income tax relief on entry, plus loss relief if a company becomes insolvent, but they do not eliminate the risk of capital loss. Investors should only consider EIS as part of a broader, diversified financial plan and should allocate only capital they can afford to hold illiquid for three years or more.
Investors must also consider ongoing retirement income needs and liquidity requirements before repositioning pension assets into long-term illiquid investments, pension drawdown that reduces available retirement capital cannot easily be reversed.
Many investors access EIS via platforms that originate and structure qualifying opportunities across a portfolio of companies, rather than selecting individual businesses directly. Black Castle Capital Partners operates in this capacity, identifying EIS-qualifying companies through its network of founders, specialist operators, and international partners, and structuring investor access with a focus on transparency, due diligence, and alignment. Importantly, Black Castle does not manage investor money; its role is to originate, structure, and present carefully assessed opportunities, allowing investors to make informed allocation decisions supported by detailed investment documentation and ongoing communication. For investors seeking exposure to early-stage UK companies without the burden of direct company selection, working with an experienced origination and structuring platform of this kind provides both access and a disciplined framework for evaluation.
Qualifying Conditions Must Be Met
Business Relief for IHT is not guaranteed simply by investing in an EIS-qualifying company. Both the investor and the company must continue to meet the relevant conditions at the date of death. Key requirements include:
- Shares must have been held for at least two years
- The company must still be a qualifying unquoted trading company at the time of transfer
- The shares must not have been subject to a binding contract for sale
- If the company converts to a different structure or is acquired, relief may be lost
Legislative Risk
Tax rules change. The history of EIS, and of Business Relief, is punctuated by amendments, Budget surprises, and consultations. The April 2026 cap on Business Relief was itself a significant shift from the previously unlimited exemption. While EIS retains strong political support as a mechanism for funding UK growth companies, investors should not assume today’s rules are permanent. The pension IHT changes, too, remain subject to technical refinement as the April 2027 operational date approaches.
The Two-Year Clock
For Business Relief to apply, EIS shares must be held for a minimum of two years before death. This means the strategy requires time to be effective, and carries the risk that death occurs before the two-year threshold is reached. Some investors use life insurance written in trust to provide a bridge for this period.
Part 5: Broader Context: Why Now?
The combination of factors at play is unusual. Several pressures are converging simultaneously:
- Pension IHT inclusion from April 2027: A known, legislated change giving advisers and clients a finite window to restructure.
- Business Relief cap from April 2026: The new £2.5m cap has already taken effect, making the size and sequencing of EIS investment more important.
- AIM downgrade: AIM shares no longer qualify for 100% Business Relief, channelling IHT-conscious investors towards EIS.
- Frozen IHT thresholds until 2031: The nil-rate band (£325,000 per individual) has not moved since 2009 and remains frozen. More estates are entering IHT territory each year through fiscal drag.
- Expanded EIS company limits from April 2026: Company investment limits have doubled (annual limit raised to £10m, lifetime to £24m for standard EIS; KIC limits also doubled), potentially widening the pool of qualifying companies.
A Structural Note on Advisory Models
Estate planning involving pensions, Business Relief, and EIS often sits across multiple advisory disciplines, including financial planning, tax advisory, and private markets. Different advisory models can therefore naturally prioritise different aspects of a client’s overall financial position. Many wealth management firms operate under an assets-under-management fee structure, where ongoing remuneration is linked to the value of assets held within managed portfolios or pension wrappers. Strategies involving pension drawdown and repositioning capital into EIS structures may therefore fall outside the scope of some traditional portfolio management arrangements.
This does not imply any lack of integrity or fiduciary intent on the part of advisers. Many provide highly valuable long-term guidance across retirement planning, investment management, and estate structuring. It does, however, highlight the importance of ensuring that intergenerational planning decisions are assessed holistically, particularly where pension wealth forms a significant part of the estate.
For investors with substantial pension assets and clear wealth transfer objectives, seeking input from advisers across multiple disciplines, including tax, estate planning, and private markets, can help ensure all available planning routes are properly evaluated in the context of the investor’s broader objectives, liquidity needs, and risk tolerance. The result is a landscape in which proactive, independently considered planning, using EIS within a broader estate strategy, has rarely been more relevant for high-net-worth individuals with significant pension wealth.
Conclusion
The tax treatment of pensions on death is changing fundamentally. For individuals with substantial pension wealth, the default assumption, that the pension is the optimal vehicle for intergenerational wealth transfer, no longer holds after April 2027. The planning considerations are most acute for assets ultimately destined for non-spouse beneficiaries, where the combined IHT and income tax burden can approach 67% without proactive restructuring.
EIS, accessed via a diversified managed portfolio and deployed in a phased, tax-year-aware manner, offers a long-established, legislatively recognised structure for repositioning that capital. The income tax relief partially offsets the cost of drawdown. Business Relief may reduce or eliminate the IHT charge at death, subject to qualifying conditions continuing to be met. And a two-year qualification period means that for those with a clear planning horizon, the window for action is available now.
This is not a strategy for every investor. EIS is illiquid and high-risk by nature, and the planning outlined here requires careful coordination across income tax, IHT, pension legislation, and, in many cases, the beneficiaries’ own tax positions. Qualified independent advice is essential. But for high-net-worth individuals facing significant pension wealth and meaningful IHT exposure on second death, the planning implications are increasingly difficult to ignore, and the legislative landscape has rarely made the case more clearly.
We would welcome the opportunity to discuss how EIS can form part of your intergenerational capital strategy. Please speak with your consultant or contact Black Castle Capital Partners directly.
Important Information — Black Castle Capital Partners Ltd
This document has been prepared by Black Castle Capital Partners Ltd for information purposes only. It does not constitute investment advice, tax advice, or a personal recommendation, and should not be relied upon as such. Black Castle Capital Partners does not provide tax advice. Investors should seek independent advice regarding the suitability of EIS or any other investment in light of their personal circumstances.
The services and investments offered by Black Castle Capital Partners Ltd. are not regulated by the Financial Conduct Authority and are not covered by the Financial Services Compensation Scheme (FSCS). Black Castle Capital Partners Ltd. is not authorised to give financial advice, so if you are unsure about anything, we strongly recommend that you seek advice from a regulated advisor. Tax treatment is subject to individual circumstances and Black Castle Capital Partners Ltd. does not provide advice in this regard. Investment is reserved for those that qualify as suitable; high-net-worth individuals or investors that certify as sophisticated. Any person accessing these documents should make their own commercial assessment of an investment opportunity after seeking the advice of an appropriately authorised or regulated financial advisor. This document should not be construed as advice or a personal recommendation to any prospective investor.
EIS investments are high risk and illiquid. These are stakes in early-stage, unquoted companies. Capital is at risk and investors may not get back the amount invested. Tax reliefs depend on companies maintaining their EIS-qualifying status throughout the required holding period and are not guaranteed.
The tax legislation referred to in this document reflects rules as understood in May 2026. The pension IHT changes described are subject to final legislative confirmation ahead of April 2027 and may be subject to further amendment. Always seek qualified independent financial and tax advice before making any investment decision. Black Castle Capital Partners Ltd, 16 Berkeley Street, Mayfair, London W1J 8DZ. admin@blackcastlecapital.co.uk