Following the 2024 Budget, we’ve been speaking with many clients who hold commercial property in a Self-Invested Personal Pension (SIPP). The question we’re hearing most often is how the proposed changes could affect their inheritance tax position, and what action should they take now?
The current position: Self-Invested Personal Pensions (SIPPs) and Inheritance Tax (IHT)
Under current rules, commercial property held in a SIPP – like other pension assets, is not considered part of your estate for IHT purposes when you pass away. This makes SIPPs an extremely tax-efficient structure for holding commercial property, as any growth in property value and eventual income or capital passed on to beneficiaries can currently avoid IHT altogether.
In fact, many property-owning clients have deliberately chosen to retain property within their SIPP for this reason, while drawing income or spending down other assets that would be subject to IHT on death.
What’s changing in April 2027?
From April 2027, the government plans to include unused defined contribution pension funds, including those held in SIPPs, within your estate for IHT purposes.
This is a major shift. If you hold commercial property in a SIPP and don’t draw down or sell it before death, the property’s full value may be added to your estate and taxed at up to 40%.
The hidden trap: potential for double taxation after age 75
The changes become even more complex if death occurs after age 75. Currently, if you die before age 75, beneficiaries can inherit SIPP funds free from income tax. If you die after age 75, any withdrawals made by your beneficiaries are subject to income tax at their marginal rate.
With the 2027 changes, your SIPP, including the value of the commercial property, will first be subject to IHT, and then taxed again as income when paid out to your beneficiaries. Example:
Let’s say your SIPP includes a commercial property worth £1 million and you pass away after age 75:
- That £1 million is now included in your estate for IHT, potentially generating a £400,000 tax liability (assuming no remaining allowances).
- When the net value is paid out to your beneficiaries, it will be then be taxed as income at their highest marginal rate, which could be as high as 45%, if they’re an Additional Rate Taxpayer. So, in our example this could result in an additional tax liability of up to £270,000.
That’s a potential combined tax burden of 67% (depending on circumstances) — a dramatic shift from the current rules. Understanding this now can help you plan more effectively.
What should you do now?
This change will affect individuals and families differently. The best starting point is to review your strategy and make sure you have the basics in place:
- Make sure your will is up to date.
- Work out the total value of your estate value, including cash, property, investments and valuable assets (such as cars, jewellery and antiques), as well as the value of your SIPP and other pension plans.
- List any gifts you’ve made in the last seven years.
- Understand the allowances – everyone has a nil rate band of £325,000 (or up to £650,000 for a couple on second death). If your residential home is passing to direct descendants such as children or grandchildren, you may also benefit from the residence nil rate band of up to £175,000 each. Combined, this can mean up to £1 million of allowances. These thresholds are frozen until 2030.
- Check your pension nomination – ensure it reflects your wishes. While not legally binding, it gives your beneficiaries choice in how to receive the funds, which can reduce tax exposure.
Estate valuations can be complex, so we recommend seeking legal and financial advice. The way gifts, exemptions and pensions are treated can make a significant difference.
Planning ahead: time is of the essence
With allowances frozen until at least 2030 and property values rising, more estates are being dragged into the IHT net. HMRC collected £7.5bn in IHT in 2024, and this is expected to increase sharply once pensions—including SIPP-held property—are brought into scope in 2027.
If you’re holding significant commercial property assets within a SIPP, now is the time to review your strategy in light of these changes.
How we can help
If you’re unsure how these changes could affect you, now is the right time to seek advice. Our team will help you understand your options and protect your family’s position. Every client’s situation is different. Pension and estate planning is complex, and mistakes can be costly. Our in-house independent financial advisers can review your assets, explain your options and put in place a plan that works for you, your family and your business. In addition, we can work alongside both commercial property and private client lawyers to:
- Provide tailored estate planning advice to help preserve family wealth.
- Evaluate the structure and tax treatment of your SIPP-held property.
- Model different scenarios for drawdown, retention, or disposal
NB: Any sale of the commercial property by the SIPP trustees, must be an ‘arm’s length’ commercial transaction at full open market value – If these rules aren’t applied the transfer may be classed as an unauthorised withdrawal which could result in a 55% tax liability of the value transferred.
We’ll help you plan with confidence, so your hard-earned assets are passed on in the most efficient way possible.
This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Some information quoted was obtained from external sources we consider to be reliable. All information is correct at the time of writing.
Tees is a trading name of Tees Financial Limited, authorised and regulated by the Financial Conduct Authority (FCA), Registered number 211314, and registered in England and Wales (Company number 4342506).
