For decades, pensions have been one of the most effective estate planning tools available to UK savers. Unused pension funds have sat outside the scope of Inheritance Tax (IHT), allowing wealth to pass to the next generation free of the standard 40% charge. From 6 April 2027, that changes.
Announced at the Autumn Budget 2024 and now legislated through the Finance Act 2026, most unused pension funds and pension death benefits will be brought within the value of a deceased person’s estate for IHT purposes. This is one of the most significant shifts in pension and estate planning law in a generation, and the window to act before the rules change is narrowing.
What Is Changing from 6 April 2027?
Under current rules, defined contribution pensions, including SIPPs, workplace pensions, and personal pensions, do not form part of your estate when you die. Beneficiaries receive the unused pension free of IHT, regardless of the fund’s value.
From 6 April 2027, unused pension funds are treated as an asset in the deceased’s estate, known as Notional Pension Property (NPP), and IHT is charged on the combined value of all estate assets including pensions above the available nil rate bands. The standard IHT rate of 40% applies to the taxable portion above the threshold.
The nil rate band (£325,000) and, where applicable, the residence nil rate band (up to £175,000 per person) continue to apply across the whole estate. There is no separate pensions nil rate band. Both thresholds remain frozen until at least 2030/31.
The Government estimates that approximately 10,500 additional estates will become liable for IHT each year as a direct result of the change, representing around 1.5% of total UK deaths annually.
Which Pensions Are Affected?
The new rules apply broadly to all registered pension schemes, including:
- Personal pensions and self-invested personal pensions (SIPPs)
- Workplace defined contribution schemes
- Uncrystallised funds (pension pots not yet accessed)
- Defined contribution drawdown pensions
- Lump sum death benefits
- Qualifying non-UK pension schemes (QNUPS) and section 615 schemes
The following remain outside IHT:
- Death-in-service benefits paid from a registered pension scheme while the member is still employed.
- Dependants’ scheme pensions from a defined benefit arrangement providing ongoing income to a surviving spouse or dependent.
- Benefits paid from a collective money purchase scheme.
- Pension funds left directly to a surviving spouse, civil partner, or a UK registered charity, which continue to benefit from the spousal and charity IHT exemptions.
The Double Tax Risk for Older Pension Holders
For many pension holders aged 75 or over, the 2027 changes introduce a genuine double tax risk. Under the income tax rules, which are not changing, beneficiaries who inherit a pension from someone who died after their 75th birthday pay income tax at their marginal rate on any withdrawals.
After 6 April 2027, that same pension will also face IHT at 40% on the gross fund value before it is distributed. In the worst case, a higher-rate taxpayer inheriting a pension from a parent who died after 75 could face a combined effective rate approaching 67% on each pound of pension wealth after both taxes are applied.
Estate Administration Changes
Personal representatives (PRs), typically the executors of the will, become responsible for reporting and paying inheritance tax on pensions wealth from April 2027. This is a significant operational change, as previously pension administrators paid death benefits at their own discretion outside the estate.
Under the new framework, PRs can issue a withholding notice to a pension scheme administrator, instructing them to hold back up to 50% of each beneficiary’s pension benefits for up to 15 months from the date of death, giving time to finalise the IHT position. Where the IHT liability is at least £1,000, a Pensions Direct Payment mechanism allows PRs to require the scheme administrator to pay the tax directly to HMRC within 35 days.
Interest accrues on unpaid IHT after six months from the date of death, and HMRC may impose penalties from 12 months onwards.
Planning Options Before April 2027
With the change confirmed in law, taking structured planning steps now provides significantly more options than waiting until 2027.
Review your expression of wishes forms. Pension nomination forms allow pension trustees to understand your intended beneficiaries. Keeping these up to date is essential, particularly if your circumstances have changed through marriage, divorce, or the birth of children. While nominations are not legally binding, trustees take them into account and they shape how benefits are distributed.
Draw down pension funds and make lifetime gifts. Withdrawing pension funds and gifting cash to family members constitutes a Potentially Exempt Transfer (PET). Provided you survive seven years, there is no IHT on the gift. Even if you die between three and seven years, tapered relief reduces the IHT rate. Income tax is payable on the pension withdrawal itself, but the net proceeds can leave your estate entirely if you survive the seven-year period.
Take your 25% tax-free lump sum. If you have not yet crystallised your pension, taking your Pension Commencement Lump Sum (PCLS) of up to 25% of the fund (capped at £268,275 in most cases) and gifting it creates a PET with no income tax cost. Gifted amounts fall outside your estate after seven years.
Use the normal expenditure out of income exemption. Regular gifts made from surplus income, above what is needed to maintain your lifestyle, are immediately exempt from IHT with no seven-year waiting period. If pension income or annuity income consistently exceeds your spending needs, structuring regular gifts to family members can reduce your estate progressively without any IHT exposure.
Consider life insurance written in trust. For those where lifetime giving is not feasible, a whole of life policy written in trust provides a lump sum to beneficiaries to meet the IHT liability on death. If premium payments qualify as normal expenditure out of income, they leave the estate immediately.
Extract business or agricultural property from SIPPs and SSASs. Where a SIPP or SSAS holds commercial property, private company shares, or agricultural land, bringing the pension within IHT can dramatically increase the estate’s liability, as Business Relief and Agricultural Relief are not available for assets held within a pension scheme. Extracting qualifying assets from the pension, where commercially sensible, can restore those reliefs. Professional advice is essential as this process carries potential income tax and Stamp Duty Land Tax consequences.
Review your will alongside your pension plans. As pension wealth is no longer an IHT-exempt reserve for non-spouse beneficiaries, the succession strategy built around keeping pensions intact may no longer serve your family’s interests. Coordinating your will with your pension nominations and any lifetime gifting strategy ensures consistent outcomes.
How UK Property Tax Accountants Can Help
Where pension wealth intersects with UK property assets, the April 2027 changes create a compounding planning challenge. A landlord holding a SIPP that owns commercial property, or whose estate already exceeds the nil rate band through property equity, faces a materially different IHT position after April 2027 than they do today.
UK Property Tax Accountants works alongside financial advisers to provide a joined-up view of your entire tax position, covering property equity, pension wealth, rental income, and estate planning in a single coordinated review. The team can model your projected estate value including pension funds, identify where the April 2027 changes will have the greatest impact, and advise on restructuring property ownership, pension drawdown strategy, and lifetime gifting to reduce your overall IHT exposure before the new rules take effect.
Frequently Asked Questions:
Will defined benefit pensions be affected?
Defined benefit pensions generally cannot be passed on as a lump sum, so most are unaffected. However, lump sum death benefits from defined benefit schemes may be within scope. Dependants’ ongoing pension income from a defined benefit arrangement remains exempt.
Does the spousal exemption still apply to pensions?
Yes. Pension funds passed to a surviving spouse or civil partner remain fully exempt from IHT, just as other estate assets do. The change affects pensions left to children, other family members, or any non-exempt beneficiary.
When is the Inheritance Tax on Pensions due?
IHT becomes due six months after the end of the month in which the person died. Interest accrues on any unpaid amount from that point. Penalties may apply from 12 months after death.
Are SIPPs holding commercial property particularly exposed?
Yes. SIPP-held commercial property falls within the pension IHT calculation, and Business Relief is not available for assets held in a pension fund. This can significantly increase liability for landlords who moved commercial property into a SIPP for tax efficiency.
How many estates will be affected?
The government estimates approximately 10,500 additional estates per year will pay IHT as a result of the pension changes, representing around 1.5% of total UK deaths annually.
Do the changes apply from 6 April 2027 for all deaths, or just new pension arrangements?
The rules apply from 6 April 2027 based on the date of death, not when the pension was set up. Anyone who dies on or after that date is subject to the new IHT rules regardless of how long they have held their pension.
