Pensions and Inheritance Tax: What Changes in April 2027

For now, no. Under the rules in force for the 2026/27 tax year, most defined-contribution pension pots and lump-sum death benefits sit outside your estate for inheritance tax. When you die, the pension scheme administrator normally pays the remaining fund to your chosen beneficiaries free of IHT, which is why pensions have long been treated as one of the most tax-efficient ways to pass on wealth.

That position changes on 6 April 2027. From that date, most unused pension funds and pension death benefits will be brought within the value of your estate for IHT. If you die before 6 April 2027, the current rules still apply, even if the pension is paid out to your family after that date. If you die on or after 6 April 2027, the new rules apply.

It is worth separating two things that often get confused. Inheritance tax is a charge on the value of your estate on death. Income tax on an inherited pension is a separate charge on the beneficiary when they draw the money. These have always been distinct, and after April 2027 both can apply to the same pension. We cover that interaction below.

From 6 April 2027, most unused pension funds and death benefits are included in the deceased person's estate for inheritance tax. HMRC confirms this applies to deaths on or after that date, and importantly it applies whether or not the scheme administrator or trustees have discretion over who receives the benefits. That discretionary structure is currently one of the main reasons pensions escape IHT, so removing it from the equation is the heart of the reform. The measure was enacted in Finance Act 2026.

Once a pension is inside the estate, it is added to your other assets and taxed under the normal IHT rules. The rate is 40% on the value above your available nil-rate bands, or 36% where at least 10% of the net estate passes to charity. Your allowances do not change: the nil-rate band remains GBP 325,000 and the residence nil-rate band GBP 175,000, both frozen until 5 April 2030, with the residence band tapered away by GBP 1 for every GBP 2 of estate over GBP 2,000,000.

Several important exclusions and exemptions remain in place:

• Death-in-service benefits paid from a registered pension scheme are excluded from the estate.
• Dependants' scheme pensions from a defined benefit arrangement, or from a collective money purchase arrangement, are excluded.
• Benefits passing to a surviving spouse or civil partner remain exempt, as do those passing to a registered UK charity, mirroring the wider IHT exemptions.

Because the nil-rate bands are frozen while pensions are added to estates, HMRC estimates that of around 213,000 estates with inheritable pension wealth in 2027/28, about 10,500 will have an IHT liability where previously they would not, and roughly 38,500 will pay more than before. The estimated average increase in IHT where pension assets are counted is around GBP 34,000. These figures are HMRC's own projections and are stated as estimates.

The most alarming feature of the reform is that some beneficiaries can face both IHT and income tax on the same pension. This happens where the pension holder dies at or after age 75.

The income-tax rule already exists and is not changing. If you die before age 75, an inherited defined-contribution pension can usually be taken by your beneficiaries free of income tax (within the relevant lump-sum allowances). If you die at or after age 75, the beneficiary pays income tax at their own marginal rate whenever they draw the money. That is the current position and it continues after April 2027.

What is new is that from 6 April 2027 the same fund can also be caught by IHT at up to 40%. So for a death at or after age 75, a beneficiary could see IHT taken from the fund and then income tax at their marginal rate on what they draw. For a higher or additional-rate taxpayer, that stacking produces a very high effective rate on the pension.

There is one piece of relief that softens the worst-case maths. HMRC has confirmed that the portion of the death benefits corresponding to the IHT (and interest) paid does not count towards the beneficiary's taxable income. In other words, income tax is charged only on the part of the pension left after the IHT has been accounted for, not on the whole gross fund. As a simplified illustration, take a GBP 100,000 pension on which GBP 40,000 of IHT is due: income tax would then apply only to the remaining GBP 60,000 at the beneficiary's marginal rate, not to the full GBP 100,000. The double charge is real, but it is not a straight 40% plus marginal rate on the entire pot. This example is illustrative only: it ignores the estate's own nil-rate bands (IHT is worked out across the whole estate, not asset by asset), so the actual IHT on any one pension depends on the estate's allowances and the beneficiary's own tax position.

If death is before age 75, there is generally no income-tax charge, so the concern is IHT alone. And where the beneficiary is an exempt recipient, such as a surviving spouse, civil partner or charity, the IHT exemption still applies and the pension can pass without an IHT charge.

After consultation, the government decided that the personal representatives of the estate, meaning the executors or administrators, are liable to report and pay the inheritance tax due on unused pension funds and death benefits. An earlier proposal to make pension scheme administrators do this was dropped following feedback. This matters in practice because it puts the reporting burden on the people already handling the estate, and it means executors must gather pension information before they can finalise the IHT position.

To make this workable, HMRC has confirmed a set of mechanics:

• Pension scheme administrators must provide the value of the relevant pension to the personal representatives so the estate can be valued. HMRC's process expects schemes to supply this information after being notified of the death.
• Beneficiaries become jointly and severally liable for the IHT on the pension benefits they are entitled to, once they are appointed.
• Beneficiaries can use the pensions direct payment scheme to require the pension scheme administrator to pay the IHT and interest due on the pension directly to HMRC, rather than having to fund it from their own resources. A payment made under a valid notice is an authorised payment, so it does not itself trigger an extra income-tax charge.
• The standard inheritance tax payment deadline still applies: IHT on the pension is due at the end of the sixth month after the month of death, and interest runs on unpaid tax after that point.

HMRC has said it will support this with guidance, a calculator to indicate whether IHT is due on a pension, and a route to pay the liability. The practical takeaway is that estates with meaningful pension wealth will become more complex to administer. Executors will need to coordinate with pension providers, value the pension correctly, and decide with beneficiaries how the tax will be funded, all within a fixed deadline. Keeping clear records of pension arrangements and beneficiary nominations now will make that process far smoother later.

The reform changes the fundamental calculus that made pensions attractive for passing on wealth. When a pension was IHT-free, many people deliberately left it untouched, spending other assets first and preserving the pension as a tax-efficient inheritance. Once the pension is inside the estate, that logic weakens, though pensions remain valuable retirement vehicles in their own right.

There is no single right answer, and the best course depends on your age, health, income needs, marginal tax rate and the size of your estate. Common planning responses now being discussed include:

• Reviewing whether to draw pension income earlier and use it, rather than leaving a large fund to be taxed twice. Drawing income has its own income-tax cost, so this is a trade-off, not an automatic win.
• Using the pension to fund regular gifting. Gifts out of surplus income can qualify for the normal expenditure out of income exemption, and other lifetime gifts may fall outside the estate if you survive seven years (with taper relief on the tax for gifts made three to seven years before death, where cumulative gifts exceed the nil-rate band).
• Making full use of the annual exemption of GBP 3,000, small gifts of GBP 250 per person, and wedding or civil partnership gifts, none of which are affected by this reform.
• Reconsidering beneficiary nominations. Leaving a pension to a surviving spouse or civil partner still passes it free of IHT, which may change who you nominate and in what order.
• Revisiting overall estate structure, including the use of the nil-rate band, residence nil-rate band, charitable giving to access the 36% rate, and, where appropriate, trusts.

Trusts remain a mainstream estate-planning tool but come with their own IHT regime. Property in a relevant property trust is subject to a principal (ten-year anniversary) charge of up to 6% of the value above the trust's nil-rate band, plus proportionate exit charges when capital leaves, and each trust has its own nil-rate band. Since 6 April 2025, whether property is excluded (outside UK IHT) is determined by long-term UK residence rather than domicile. Pensions being pulled into the estate does not change the trust rules, but it can change whether a trust-based strategy is worthwhile for you. For the wider trust mechanics, see our guide on offshore trusts and UK tax, and for how residence now drives your exposure, see residence-based inheritance tax.

Two cautions. First, pension decisions are regulated financial advice, and drawing down or restructuring a pension purely for tax reasons can backfire if it leaves you short in retirement or crystallises income tax unnecessarily. Second, although the primary law is now settled in Finance Act 2026, HMRC is still publishing the operational detail (including the calculator and reporting process), so it is sensible to plan on the confirmed principles now and firm up the mechanics closer to April 2027. Anyone with a substantial pension and estate should take coordinated tax and financial-planning advice well before the change takes effect.