Death benefits and IHT · The 2027 tax traps, worked
The £2m RNRB taper, worked: when a pension costs £150,000 of nil-rate band
Skip to calculators for this topicThe rule says a pension can erode the residence nil-rate band. One worked estate shows the size of it: £500,000 of pension turns £175,000 of band into £25,000, and £520,000 of tax into £780,000.
3 min read · Last reviewed
— In short
On a ratified £2.3m demonstrator, a £500,000 in-scope pension pushes the taper value past the £2m threshold. The residence nil-rate band tapers by £1 for every £2 over £2m, so £175,000 of band falls to £25,000 — £150,000 lost. Estate inheritance tax rises from £520,000 without the pension to £780,000 with it, a £260,000 increase driven partly by the lost band.
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A companion guide sets out why an unused pension can erode the residence nil-rate band from 6 April 2027: the £2m RNRB taper and pensions walks the rule. This one puts a number on it, using the ratified demonstrator that also runs on the calculator.
The estate
Take a self-contained case: a £500,000 qualifying residence passing to direct descendants, £1,300,000 of other free-estate assets, and a £500,000 in-scope pension. Liabilities and other exemptions are nil, there is one full £325,000 nil-rate band, the maximum residence nil-rate band is £175,000, and no transferred bands apply.
- Qualifying residence to direct descendants
- £500,000
- Other free-estate assets
- £1,300,000
- Free estate excluding the pension
- £1,800,000
- In-scope pension
- £500,000
- Nil-rate band
- £325,000
- Maximum residence nil-rate band
- £175,000
Without the pension
The free estate is £1,800,000 — below the £2m taper threshold — so the residence nil-rate band is available in full. With £325,000 + £175,000 of bands, £1,300,000 is taxable at 40%.
- Estate value
- £1,800,000
- Nil-rate band
- £325,000
- Residence nil-rate band (full)
- £175,000
- Taxable estate
- £1,300,000
- Inheritance tax at 40%
- £520,000
With the pension
Add the £500,000 pension and the taper value becomes £2,300,000 — £300,000 over the £2m threshold. The residence nil-rate band tapers by £1 for every £2 of that excess, a £150,000 reduction, leaving just £25,000. Now £1,950,000 is taxable at 40%.
- Taper value (E)
- £2,300,000
- Excess over the £2m threshold
- £300,000
- RNRB reduction (£1 per £2)
- £150,000
- Residence nil-rate band remaining
- £25,000
- Taxable estate
- £1,950,000
- Inheritance tax at 40%
- £780,000
The inheritance tax rises from £520,000 to £780,000 — a £260,000 increase from a £500,000 pension. Part of that is the pension’s own value entering the estate; part is the £150,000 of residence nil-rate band lost purely because the pension pushed the taper value over £2m.
What the £260,000 is — and is not
The £260,000 is the whole-estate increase from including the pension. It is not the same as “the pension’s inheritance tax”. Finance Act 2026 requires tax to be identified as attributable to pension property, but HMRC has not yet published the detailed attribution calculation, so any pension “share” of the bill is a modelled figure that stays labelled modelled and guidance-pending. The estate-level change and the modelled pension share are different concepts and must never share one label — the calculator shows them on separate lines.
The enacted scope, exclusions and personal-representative role are in pensions and inheritance tax from April 2027, and the wider framework is in pensions, death benefits and inheritance tax. Run this exact comparison on the Pension IHT calculator. For planning and illustration only; this guide states the rules and does not recommend a course of action.
Finance Act 2026 · IHTA 1984 ss.8D–8M · IHTM46023 · HMRC “Inheritance Tax on pensions” technical note §§3.1, 3.4 · abrdn Techzone
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Common questions
- How much residence nil-rate band can a pension cost?
- It depends on the estate. In the ratified £2.3m demonstrator, a £500,000 pension pushes the taper value £300,000 over the £2m threshold, so the £175,000 residence nil-rate band tapers by £150,000 to just £25,000. A larger estate can lose the band entirely.
- Is the extra £260,000 of tax all “pension inheritance tax”?
- No. The £260,000 is the whole-estate increase from including the pension — part of it is the residence nil-rate band lost at the taper stage. A separate “modelled pension share” of the bill is a different figure and stays labelled modelled while HMRC’s detailed attribution guidance is pending.
Sources
Based on Finance Act 2026, HMRC’s May 2026 technical note, IHTA 1984 ss.8D–8M and IHTM46023, and abrdn’s technical guide.
- HMRC Inheritance Tax Manual, IHTM46023 — Calculating the RNRB: terms used: the 'taper threshold' gov.uk
- Inheritance Tax Act 1984, section 8D — Extra nil-rate band on death if interest in home goes to descendants etc legislation.gov.uk
- Technical note: Inheritance Tax on pensions gov.uk
- Finance Act 2026 legislation.gov.uk
For planning and illustration purposes only. Verify all inputs against source documents. This explainer does not constitute financial or tax advice.