Pensions, inheritance tax and EIS: a guide for advisers

From 6 April 2027, most unused pension funds will be counted as part of the estate for inheritance tax. For older clients with more pension than they will spend, that reverses the familiar order of events: the pension, long treated as the asset to leave until last, can become one of the most heavily taxed things a client passes on.

One response is to draw taxable income from drawdown and reinvest it through EIS. The 30% income tax relief offsets part of the tax created by the withdrawal, and after two years the shares may qualify for Business Relief and leave the estate free of inheritance tax. The relief is only half the equation, though. Whether the idea creates value depends on what the money is invested in and whether those shares hold their worth. This guide sets out the mechanics, runs the numbers honestly at 30%, and is candid about the clients for whom the case is weak.

What changes on 6 April 2027

The change is law. Finance Act 2026 received Royal Assent on 18 March 2026, and the new rules apply to deaths on or after 6 April 2027.

Caught. Uncrystallised funds, drawdown funds and most lump sum death benefits.

Not caught. Death-in-service benefits from a registered scheme and dependants’ scheme pensions.

Spouses and civil partners. Pensions passing to them remain exempt, like other assets. For a married client the question usually arises only on second death.

No Business Relief inside the wrapper. The member does not own the scheme’s assets, so the pension is taxed at full value whatever it holds. Business Relief becomes possible only once the money is held personally, in qualifying shares.

The double charge after age 75

If the member dies at 75 or over, the beneficiaries also pay income tax at their marginal rate as they draw the inherited funds. The income tax is calculated on what is left after inheritance tax, but the combined charge is still severe. From each £100 of pension, for an estate already above the nil-rate bands:

Scottish income tax bands differ, and the top Scottish rate pushes the combined figure higher.

Why drawing to cash is not enough

On its own, drawing money out and holding cash rarely helps a higher-rate client whose heirs are also higher-rate taxpayers. The withdrawal is taxed at 40% now, and the cash is then taxed at 40% in the estate: the same place the pension would have reached. From £40,000, either route leaves the heirs £14,400. The value comes from what the money does next.

EIS gives 30% income tax relief on subscriptions of up to £1 million a year, or £2 million where the excess goes into knowledge-intensive companies. Pension income counts towards the tax bill like any other income, so the relief can offset tax created by a withdrawal.

Where EIS fits

The reliefs that matter for this strategy, subject to the rules and each client’s circumstances:

Income tax relief and carry back. 30% relief, claimed in the year of subscription or carried back one year, once each EIS3 certificate arrives. Relief cannot take the tax bill below nil.

Business Relief after two years. Qualifying shares held for two years, and still held at death, can attract 100% relief within the £2.5 million allowance shared with other business and agricultural property, and 50% above it. Unused allowance can pass to a surviving spouse or civil partner.

Tax-free growth and loss relief. Gains are free of capital gains tax after three years. If a company fails, the loss net of income tax relief can be set against income.

The key difference from SEIS. At 50%, SEIS relief can cancel the tax on a higher-rate withdrawal by subscribing 80% of it. At 30%, EIS cannot - a client would need to subscribe around 133% to cancel the tax in full. With EIS, the case rests mainly on the inheritance tax outcome, not on matching relief to tax.

A worked example

Consider a widower, aged 77, with other income of £60,000, an estate above the nil-rate bands, and higher-rate children. He has taken his tax-free cash and holds a drawdown pot he will not need.

Drawing £40,000 takes his income to exactly £100,000, stopping short of the personal allowance taper. The relief recovers 45% of the extra tax, and he needs no money from outside the pension. What the heirs ultimately receive from that same £40,000, assuming death at least two years after subscribing, at 75 or over, with higher-rate heirs:

At full value the strategy roughly doubles what the heirs receive. The figures ignore fees and growth and are based on 2026/27 rest-of-UK rules; each client’s position will differ.

How much the shares must keep

The number that decides the case is break-even: how much of each pound subscribed the shares must still be worth at death to match leaving the money in the pension. In the base case it is about 42p in the pound - the shares need to be worth around £10,080 at death. But it moves sharply with the assumptions, and this is where individual modelling earns its place:

Two readings stand out. The more income tax the heirs would face on an inherited pension, the more the strategy gains - so it works hardest for additional-rate heirs and barely at all where heirs are basic-rate. And the size of each withdrawal matters as much as the investment: letting income stray into the taper, where the effective rate is 60%, lifts break-even to 72p before the shares have done anything.

An investment first, a tax strategy second

Tax relief cannot turn a weak company into a good investment, and it cannot rescue this strategy if the shares fall far enough. The reliefs exist precisely because early-stage companies are more likely to fail than established ones; they share part of the downside rather than remove it. The outcome of an EIS portfolio still depends on whether its companies can build valuable products, defend their positions, scale and exit. That makes manager selection more important here, not less, and advisers should assess an EIS manager backing a pension-funded subscription as rigorously as any other - on track record, sector expertise, portfolio construction, exit discipline, fees and alignment.

Who it suits

The case is strongest for a narrow profile: a client aged 75 or over, with a sizeable pension they will not need, an estate already above the nil-rate bands, higher- or additional-rate heirs, and genuine capacity to accept early-stage risk on a portion of surplus wealth. EIS’s £1 million annual capacity suits larger pots better than SEIS.

It is weaker, or wrong, when death before 75 is a realistic prospect (heirs pay no income tax on the inherited pension, so leaving it gives them £24,000 and the shares must keep about 82% of their value to match), when the pension will pass to a spouse, when the £2.5 million Business Relief allowance is already absorbed by business or farming assets, or where regular gifts out of surplus income would achieve the aim without investment risk. Adding the pension to an estate can also push it over £2 million and taper the residence nil-rate band; Business Relief does not restore it.

Risk, an honest assessment

EIS investments should form only part of a diversified portfolio, and clients should be prepared to lose some or all of the capital in any individual company. The principal risks:

Company and technology risk. Early-stage businesses have limited revenue and evolving models, and many will not reach scale.

Liquidity and exit risk. The shares are unquoted, cannot be sold for three years without losing relief, and exits often take longer than expected. Heirs may inherit holdings they cannot easily sell.

Timing risk. Business Relief needs two years of ownership from each share issue. Death inside that window usually leaves the shares taxable - though, at full value, the heirs can still come out ahead of the pension.

Tax risk. Reliefs depend on the company and the investor meeting ongoing conditions, and tax rules can change. These figures predate the Autumn Budget and should be reviewed against it.

EIS here is suitable only for clients with enough income tax liability to use the relief, who can accept illiquidity over several years, and for whom losing the capital would not cause hardship. A suitability assessment by a qualified adviser is essential.

Conclusion

From April 2027, a surplus pension can become one of the most heavily taxed assets an older client leaves behind, and drawing it into cash changes little on its own. Reinvesting the withdrawal through EIS can change the outcome materially - relief offsets part of the extra income tax, and qualifying shares may later pass free of inheritance tax - but only for the right client, and only if the shares hold enough of their value. The right question is not “how much relief can be claimed?” but “what is the money invested in, and will it still be worth enough when it matters?”

For EverQuest, the answer is Deep MakeTech: UK science and engineering with the potential to reach global industrial markets, backed by specialist selection, diversification and active support.

Talk a client case through. EverQuest invests in Deep MakeTech through the EverQuest EIS Fund. hello@everquestcapital.com