If your home, savings and investments come to £1.9 million, the residence nil-rate band looks safe. You're under the £2 million line, so the extra £175,000 each that a couple can pass on with the family home stays intact.

But that total may be missing a line. From 6 April 2027, most unused pension pots will count as part of your estate for Inheritance Tax (IHT), and they'll count towards the £2 million test too. Death-in-service lump sums and dependants' scheme pensions stay outside. The change isn't in force yet, and we've covered the wider rule separately. This post is about the threshold it can push you over.

For a couple with sizeable pensions, being measured at £2.7 million instead of £1.9 million can cost all £350,000 of their combined residence allowance. At 40%, that's £140,000 of extra tax, on top of the tax on the pensions themselves.

How the £2 million taper works

In 2026/27, every estate has a nil-rate band of £325,000. On top of that sits the residence nil-rate band (RNRB) of £175,000, available when your home, or your share of it, passes to direct descendants such as children or grandchildren.

Married couples and civil partners can pass any unused allowance to the survivor. So the second estate can have up to £650,000 of nil-rate band and £350,000 of RNRB, a combined £1 million, before any IHT is due. Above that, the rate is 40%.

The RNRB comes with a condition. It's reduced by £1 for every £2 that the net value of the estate exceeds £2 million.

• A single RNRB of £175,000 is gone once the estate reaches £2.35 million.
• A couple's combined £350,000 is gone at £2.7 million.
• The £325,000 nil-rate band is never tapered. Only the residence band is.

"Net value" means everything in the estate, less debts, before any exemptions or reliefs. Keep that in mind for later. Both bands and the £2 million threshold are frozen until April 2031, so none of these figures rise as house prices and investments do.

Inside the band, the marginal rate is 60%

Strictly, £2 million is the top of a slope rather than a sheer drop. The allowance drains away over the next £700,000 instead of vanishing in one step. But the slope is steep.

Every extra £2 of estate inside that band is taxed at 40%, which is 80p. It also wipes out £1 of RNRB that would have sheltered another £1 from 40% tax, which is another 40p. That's £1.20 of tax on £2 of estate, an effective 60% rate from £2 million to £2.7 million for a couple.

If that shape looks familiar, it's the same mechanism as the Personal Allowance taper between £100,000 and £125,140 of income. Same £1-for-£2 withdrawal, same 60% result, applied to what you pass on rather than what you earn.

A worked example with Philip and Alison

Consider Philip and Alison, both 68, in England. They're a hypothetical couple, not a real household. Both retired, with two adult children and a mortgage-free home they plan to leave to them.

• Home: £950,000, owned jointly
• ISAs (Individual Savings Accounts): £520,000 between them
• A GIA (General Investment Account) and cash: £430,000
• Philip's SIPP (Self-Invested Personal Pension): £560,000
• Alison's workplace pension: £240,000

They've drawn on everything except the pensions. For years that was the textbook order, because unused pensions sat outside the estate. Without them, the couple's assets come to £1.9 million, under the line.

To keep the arithmetic clean, assume today's values. Philip passes on first and leaves everything to Alison. His own estate is about £1.5 million, under £2 million, so nothing is tapered and both of his allowances transfer in full. The pension money, both his and hers, is still unspent when Alison passes on. Pension money a spouse inherits and leaves invested is expected to count towards their own estate in the same way. Then compare her estate two ways, once with the pensions outside it (as under today's rules) and once with them inside it (as from April 2027).

Same house, same savings, same family. Counting the pensions adds £800,000 to the estate and £460,000 to the bill.

• £320,000 of that is 40% on the pensions themselves.
• £140,000 is the RNRB disappearing. The pensions lift the estate from £1.9 million to exactly £2.7 million, the point where a couple's £350,000 is fully tapered.

Put another way, the first £100,000 of pension, which fills the gap up to £2 million, costs 40%. The other £700,000 sits in the taper band and costs 60%. Across the full £800,000, the effective rate is 57.5%.

The levers, and what each one costs

None of these is free. Each trades something you hold today against tax your family would pay later, and the right mix depends on your own numbers.

Drawing the pension down in retirement

The obvious move is to draw more from the pension now. Pension income is taxed at your marginal rate, 20% or 40% for basic and higher-rate taxpayers (rates differ in Scotland), which looks better than a 60% marginal IHT rate.

But drawing on its own achieves very little. Take money out of a pension and leave it in a savings account, and it's still in the estate. The only part that has left is the income tax you paid. Tax-free cash works the same way, moving from the pension to your bank account, and from April 2027 both are counted.

The table shows £10,000 of pension inside the taper band under each route, at the couple's 60% marginal IHT rate, ignoring tax-free cash and assuming any gift falls outside IHT.

Drawing and holding comes out worse than leaving the money where it was. Drawing and then spending or giving it away comes out better, because the whole £10,000 leaves the estate. Taking the money out is only half the decision. What happens to it next is the other half.

Two things move these numbers. If the pension holder is 75 or over when they pass on, beneficiaries also pay income tax on what they draw from an inherited pension, which strengthens the case for drawing in retirement. And pension and investment values can fall as well as rise, so the estate that's eventually measured may be larger or smaller than any projection made today.

Spending

Money you spend on your own retirement leaves the estate in full. For a couple in the taper band, an extra £15,000 a year on travel, hobbies or a more comfortable budget, over ten years, takes £150,000 off the estate and up to £90,000 off the IHT bill.

The limit is your own security. Spending that looks affordable at 68 needs to stay affordable at 88, through care costs and market falls. An IHT calculation on its own can't see that side of the ledger.

Lifetime gifting

Gifts take value out of the estate measured against the £2 million test straight away. That holds even for gifts still inside the seven-year window, which can count against the nil-rate band (a rule we've covered in its own post). The taper looks at the estate itself, not at gifts already made.

Regular gifts made out of surplus income, as part of a normal pattern and without reducing your standard of living, can be exempt from IHT immediately if they meet HMRC's conditions. The catch is the same as with spending. Money given away is no longer there if you need it.

Pension nominations

Your nomination, sometimes called an expression of wishes, tells the scheme who you'd like to receive your pension. Most schemes treat it as guidance rather than an instruction, but it's the main way to steer where the money goes. From April 2027, that choice also shapes where the IHT lands.

• To a spouse or civil partner. No IHT on the first estate, thanks to the spouse exemption. But money still unspent later can count again in the survivor's estate, as it does for Alison.
• To children or other family. Taxable in the first estate, where it uses up that partner's nil-rate band and leaves less to pass to the survivor. In exchange, it never adds to the survivor's estate.
• To charity. Exempt from IHT.

The first estate matters too

The taper isn't only a second-estate problem. It applies to each partner's estate separately, and because it measures value before exemptions, the spouse exemption doesn't shield it.

Suppose Philip's SIPP were £1.2 million instead of £560,000, and more of the investments sat in his name. His estate could top £2 million when he passes on, even though everything goes to Alison and no IHT is due. His £175,000 RNRB would be tapered at that point, and only what's left could pass to Alison. Above £2.35 million, none of it passes across.

Pensions can't be moved between spouses during your lifetime, so a large pot stays in its owner's estate. That puts who holds what, and which pots get drawn first, at the centre of the IHT plan as well as the income plan.

The two estates also pull against each other. Leaving a pension to the children keeps the second estate smaller but uses up the first partner's nil-rate band. Leaving it to a spouse keeps the first estate free of IHT but can push the second into the taper band. The balance depends on the size of both estates and how long the survivor's money needs to last.

Which tax, and when

Crossing £2 million doesn't mean a household has got anything wrong. Leaving a pension untouched can still be the right call when it may be needed later. The point is to make that call knowing the price on each side. Income tax now, at 20% or 40%. IHT later, at up to 60% inside the band.

That comparison shifts every year, as pots grow or shrink, as the threshold stays put and as your own spending changes. It's the kind of trade-off Optiml is being built to model for UK households when we launch in the UK, year by year and on your own numbers.

It's not about staying under £2 million at any cost. It's about knowing what crossing it costs.

Then the decision is yours.