The UK government has confirmed that unspent pension funds and death benefits will become subject to Inheritance Tax (IHT) for deaths occurring on or after 6 April 2027.
In other words, from that date the value of remaining pension assets when someone dies will generally be counted as part of their estate for IHT purposes.
This reform is planned to be introduced in the Finance Bill 2025–26 and will apply regardless of whether the pension trustees or administrators have discretion over the death benefits.
Why the change?
Currently, many pensions (especially most modern defined contribution schemes and some defined benefit lump sums) are written under discretionary trusts, so any funds left in the pension when you die are not considered part of your estate for IHT. This allowed people to use pensions as a wealth transfer loophole, leaving large pension pots to beneficiaries free of IHT.
The government views this as a distortion – pensions were being used as a tax-free inheritance vehicle rather than just retirement funding. By bringing pensions into the estate for IHT, the aim is to make the system fairer and close this loophole.
When does it start?
The new rules will take effect for pension member deaths on or after 6 April 2027. If someone dies before that date, their pension death benefits will be treated under the old rules (usually outside the estate if discretionary). For deaths from that date onwards, the new rules apply.
How many people are affected?
Most estates won’t be touched by this change, but it’s not a trivial number. HMRC estimates that in 2027–28 about 10,500 estates will face an IHT bill where they wouldn’t have before, and around 38,500 estates will end up paying more IHT than they would have under the current rules. This equates to roughly 1.5% of all deaths in that year newly caught by IHT due to pensions.
The average additional IHT per affected estate is expected to increase by around £34,000. (Of course, people may adjust their plans – for example, drawing down pensions faster – so the actual numbers could be lower after behavioural changes.)
Which pensions and death benefits will be taxable?
Under the new law, almost all types of pension death benefits will count as part of your estate for IHT when you die. In technical terms, any “property held for the purposes of a registered pension scheme” (or a qualifying overseas pension or certain employer schemes) that can be used to pay relevant death benefits is treated as if you owned it at death.
This means the value of your unspent pension pot (investments, cash, etc. in drawdown or untouched) and any due pension death benefits gets added to your estate total.
The draft legislation defines “relevant death benefit” broadly to include things like:
- Pension lump sum death benefits – e.g. an untouched pension pot paid out as a lump sum on death, or a drawdown account paid as a lump sum.
- Ongoing pension payments to non‑exempt beneficiaries – e.g. inherited drawdown income and guaranteed‑period instalments from a lifetime annuity or scheme pension (these are continuing payments after death under “pension rule 2”). Important clarifications: (1) if the recipient is your spouse/civil partner or a charity, the IHT spouse/charity exemption applies so no IHT is payable on that share; and (2) survivor income under a joint‑life annuity is generally out of scope because the survivor has their own legal right to those payments, not something passing through your estate.
- Other pension death benefits – basically any payment or benefit provided after death from your pension arrangements (except the specific exclusions noted below).
In short, if it’s a benefit paid after your death from your pension, it will count towards your estate value for IHT – even if under current rules it would bypass your estate.
Crucially, the pension scheme’s discretion will no longer shelter the funds from IHT. Today, most private pensions give trustees or scheme administrators discretion over who gets the death benefits (often guided by your nomination), which is why those payouts aren’t part of your estate. From 2027, that discretionary status is irrelevant – the funds are taxed “regardless of whether the scheme trustees have discretion” over the payments.
What about pensions in drawdown or payment?
If you were already taking an income (drawdown or annuity) and you die:
- any remaining drawdown fund is included;
- guaranteed‑period instalments from a lifetime annuity or scheme pension are included (continuing payments after death);
- a dependants’ scheme pension from a defined benefit (DB) or collective money purchase scheme is specifically excluded; and
- survivor income under a joint‑life annuity is not in scope because the survivor’s entitlement is separate from the deceased member’s estate.
Examples of what will be in scope from April 2027:
- The balance of your Self‑Invested Personal Pension (SIPP) or drawdown account that hasn’t been paid out before your death – this value will be part of your estate for IHT.
- Any lump sum death benefits from a personal or workplace pension – for example, an uncrystallised funds lump sum death benefit (the technical term for paying out a pension pot that hadn’t been accessed) will count in the estate.
- Any ongoing income to non‑exempt beneficiaries from inherited drawdown or guaranteed‑period annuity instalments. (By contrast, joint‑life annuity survivor income is out of scope; see below.)
- Any unauthorised payments after death from your pension (rare), which still fall within the wording of relevant post‑death payments.
Examples of what will be out of scope:
- A dependants’ scheme pension paid by a DB or collective money purchase scheme.
- Survivor income under a joint‑life annuity (the survivor has their own rights under the annuity contract).
- Any benefits passing to a spouse/civil partner or charity (covered by existing IHT exemptions).
Put simply, the new rules cast a very wide net over pension death benefits. If your pension can pay out anything when you die – a lump sum, income drawdown, annuity continuation under a guarantee period, etc. – it will likely fall within your estate for IHT unless it meets one of the exclusions above (or goes to an exempt recipient).
However, there are some important exceptions to note:
- Death‑in‑service lump sums are excluded: Many people have death‑in‑service benefits from their employer. The government confirmed that death‑in‑service benefits will remain outside the scope of IHT even if paid via a pension scheme. This ensures consistent treatment whether arranged via a pension or a separate life trust (and removes historical anomalies in some public‑sector schemes).
- Dependants’ scheme pensions are excluded: If a DB (final salary) scheme pays a dependants’ pension (e.g. to a surviving spouse or child), that will not count as part of the estate for IHT. So, traditional spouse’s pensions from employment schemes remain outside IHT (as they are now).
- Charity and spouse exemptions remain: The law does not change the fundamental IHT exemptions when death benefits pass to a surviving spouse/civil partner or to a registered charity. These exemptions will apply even if the payment is delayed or subject to trustee discretion.
Are any types of pensions entirely unaffected?
Not really – it’s more about the type of benefit than the type of scheme. Both defined contribution and defined benefit pensions can have in‑scope death benefits (DC schemes typically pay lump sums or offer inherited drawdown; DB schemes might pay lump sum death benefits or children’s pensions, etc.). The main carve‑outs are the dependant’s scheme pension income and death‑in‑service lump sums.
One notable point: if you have a very old style pension with no trustee discretion (where you had an absolute direction for who gets the money), those are already counted in your estate under current rules. The new rules won’t change much there, except that the handling and processes will align with the new system. Conversely, most modern pensions that were discretionary will now be brought into estate – a big change.
No Business or Agricultural relief on pension assets
Many clients have asked how the new pension‑IHT rules interact with Business Property Relief (BPR) or Agricultural Property Relief (APR). These reliefs can reduce or eliminate IHT on qualifying business assets or farmland in your estate.
However, the legislation makes it clear that BPR and APR will not apply to pension‑held assets that become taxable under these new rules. Specifically, any property treated as part of your estate by virtue of being in a pension “is, irrespective of the assets comprised in it, not to be regarded as relevant business property or agricultural property” for IHT relief purposes. In plain terms: if your pension contains assets like shares in a business, business premises, or agricultural land, you cannot claim BPR or APR on their value when they’re taxed as part of your estate via the pension.
This is a significant point because, outside a pension, such assets might have qualified for relief. For example, from 6 April 2026 the government will reform APR/BPR so that the 100% rate of relief applies to the first £1 million of combined agricultural and business property, with 50% relief thereafter (and certain “not listed” exchange‑traded shares, e.g. AIM, limited to 50%). Outside a pension those reforms still offer substantial relief; inside a pension the relief is zero under the new pension rules.
Example: Suppose your SIPP owns a commercial property used in your family business. Under current rules, that property is outside your estate entirely (since the pension is discretionary) and no IHT would apply at all. Under the 2027 rules, that property’s value would be included in your estate for IHT, and you cannot claim BPR/APR on it because it sits inside the pension. By contrast, had you owned it personally, from April 2026 at least the first £1 million of qualifying business/farm assets can still get 100% relief, and the rest 50% relief (and there are ways to increase the relief – see my article on Business Property Relief changes).
Note that both you and your spouse/civil partner have a £1 million APR/BPR allowance (applied to each person’s own estate on death). So although the spouse exemption means passing the pension to a spouse remains IHT‑free, the first-to-die’s £1 million APR/BPR allowance is wasted as a result.
Who will be liable for the tax?
One of the biggest practical questions is who has to handle this new tax charge. It will be your estate’s Personal Representatives (PRs) – i.e. your executors – who have the duty to report and pay any IHT on your pension assets.
From 6 April 2027, PRs – who already administer the rest of the estate – will be liable for reporting and paying IHT on unused pension funds and death benefits.
Pension trustees or providers are not directly liable for the tax: The law explicitly says the persons liable do not include the trustees of the scheme or any other person who holds the pension property, except that a scheme administrator becomes jointly liable if they’re required (by a beneficiary’s notice) to pay tax directly to HMRC and fail to do so in time.
Beneficiaries of the pension can be held responsible too: Pension beneficiaries become jointly and severally liable with the PRs for any IHT due on the pension benefits from the point they’re appointed as beneficiaries. Practically, HMRC can collect the tax from the estate or from the beneficiary who received the pension, ensuring the tax is recoverable.
How and when will the tax be paid?
The mechanics of paying this pension‑related IHT will largely follow the existing IHT rules and timelines, with a few new procedures to accommodate the unique nature of pension assets. Here’s an overview of the process and key deadlines:
- Traditional IHT timetable still applies: The standard rule that IHT must be paid within 6 months of the date of death remains. After that, interest starts accruing on unpaid tax.
- Inheritance Tax returns (IHT400) will include pension details: If the estate (including the pension) exceeds the thresholds or otherwise isn’t an excepted estate, the executors will need to submit the full IHT400 account. The deadline for filing the IHT400 remains 12 months from date of death.
- Pension scheme administrators must provide information promptly: Pension scheme administrators (PSAs) must inform the PRs of the value of the deceased’s pension for IHT purposes within 4 weeks of being notified of the death.
Ways to fund the tax:
- Direct payment from the pension (the new “Pensions IHT Payment Scheme”): a pension beneficiary can give notice to the scheme administrator to pay the IHT due on that beneficiary’s pension benefit directly to HMRC. If the amount is £4,000 or more, the scheme must pay within 3 weeks; if it’s less, the scheme has discretion. Any amount the scheme pays this way is treated as if the beneficiary paid it.
- Payment by the executors from the estate (with recovery): If the estate has liquidity, the PRs can pay in the first instance and then recover the pension‑attributable IHT from the recipient of the pension, with a statutory right to reimbursement from the vestee.
- Combination of methods: Mix and match as needed to meet the 6‑month deadline and avoid interest.
No double taxation of income tax and IHT:
To avoid stacking IHT and income tax on the same funds, the Finance Bill inserts ITEPA 2003 s.567B, giving beneficiaries a deduction for any IHT paid on the pension when calculating their income tax.
Do you need to update your Will or nominations?
“Should I include my pension in my Will now?” – no. Your pension death benefits are still distributed by the scheme trustees/administrator under the scheme rules and your nominations (expression of wish), not by your Will. Keep your expression of wish up to date with each provider; trustees usually follow your wishes but are not bound by them where they have discretion.
DO review your estate planning if your pension holds business or agricultural assets. From 6 April 2027, pension assets are pulled into the estate for IHT, but those pension assets will not qualify for Business Property Relief (BPR) or Agricultural Property Relief (APR) even if the underlying holdings would have qualified outside a pension. The draft legislation says pension property treated as part of the estate is not to be regarded as relevant business property or agricultural property. In short: BPR/APR won’t shelter business/farm assets when they’re inside a SIPP/SSAS. See my article on Business Property Relief changes.
From 6 April 2026, the Government plans to keep 100% relief for the first £1 million of combined qualifying business and agricultural property per estate, with 50% relief thereafter; and to restrict relief on certain “not listed” shares to 50%. There is a further £1 million allowance on trusts holding qualifying assets, and all allowances are subject to the 7 year rule. So there are valuable allowances for business/agricultural property when held outside a pension and it’s worth thinking about restructuring.
Also, think about your IHT position across both deaths (and who receives the pension). Transfers to a spouse/civil partner or a charity remain exempt under the new rules, even if payment is delayed or subject to trustee discretion. So directing pension death benefits to a spouse/civil partner continues to be IHT‑free on first death. But this can cause an IHT problem on second death (or on first death if benefits go to non‑exempt beneficiaries or a discretionary trust).
Remember that the core inheritance tax allowances are now scheduled to stay at current levels until 5th April 2030: the nil‑rate band £325,000, the residence nil‑rate band £175,000 (tapering away £1 for every £2 of estate value above £2 million), and transferability to a surviving spouse/civil partner. These interact with pension values from 2027 onwards.
Lifetime giving may be a sensible option – this can be in to trust – see my article on this.
Jennifer Wiss-Carline is a practising Solicitor regulated by the SRA and a Chartered Legal Executive (FCILEx), bringing over two decades of experience to her practice. Specialising primarily in Private Client law, Jennifer expertly handles matters including Wills, Inheritance Tax and Estate planning, Lasting Powers of Attorney for individuals and businesses, Deputyship Orders and more.
