Pensions enter the IHT net from April 2027 — what changes

From 6 April 2027, most unused UK pension funds and death benefits will be added to the estate for Inheritance Tax (IHT) purposes. This is one of the largest changes to UK pension taxation since the 2015 freedoms. Death-in-service benefits, spouse/civil partner transfers, and charity transfers remain exempt. HMRC estimates around 10,500 additional estates per year will face IHT that wouldn’t have done before, and roughly 38,500 estates will pay more IHT than under the current rules — with an average increase of approximately £34,000 in IHT liability where pensions are included. The change was announced at the Autumn Budget 2024 and confirmed in HMRC’s Inheritance Tax on unused pension funds and death benefits consultation response.

This is what changes, what stays, and the planning responses.

The rule, in plain English

Under the current rules (until 5 April 2027):

• Most UK defined-contribution pensions sit outside the estate for IHT.
• Pension passes to nominated beneficiaries either tax-free (death before 75) or taxed as income at the beneficiary’s marginal rate (death after 75).
• This treatment has made pensions a powerful inheritance vehicle for wealthy savers.

From 6 April 2027:

• Most unused DC pension funds and death benefits become part of the deceased’s estate for IHT calculation.
• IHT at 40% applies to the value above the available nil-rate band (£325,000 base + up to £175,000 residence nil-rate band).
• The pre/post-75 income tax rules on beneficiary withdrawals continue to apply in addition.

The combined effect: a wealthy estate including a large pension pot could face IHT on the pension followed by income tax when the beneficiary draws on it — potentially compounding to an effective rate above 50%.

What stays exempt

The new rules keep several important exemptions:

Death-in-service benefits

Lump sums paid by an employer pension scheme on the death of an active employee (typically 2–4× salary) remain outside the IHT scope. This was an explicit carve-out in the final policy after industry consultation — the alternative would have penalised families in tragic circumstances.

Spouse and civil partner

Pension funds passing to a UK-resident spouse or civil partner continue to be completely IHT-free. This is the standard inter-spousal exemption that applies to all assets.

Charities

Pensions left to UK-registered charities remain IHT-free.

Long-term UK resident non-dom transitional protection

The technical detail interacts with the post-April-2025 non-dom regime changes — long-term UK-resident non-doms have specific transitional rules. [VERIFY: confirm specific non-dom IHT pension treatment with HMRC’s detailed guidance.]

Who’s actually affected

HMRC’s impact assessment estimates:

• ~213,000 estates per year have inheritable pension wealth.
• ~10,500 estates would face IHT that wouldn’t previously have done.
• ~38,500 estates would pay more IHT than under current rules.
• Average extra IHT: ~£34,000 where pensions are included.

In broad terms, the change affects estates large enough to exceed the available nil-rate bands. For estates well within the £325,000 + £175,000 RNRB allowance (combined £500,000 for an individual; up to £1m for couples using the inter-spousal transferability), the change has limited practical effect — there’s no IHT due regardless of pension inclusion.

The bite lands hardest on:

• Estates with substantial DC pension pots (£300k+).
• Single people or widowed (without the spouse exemption to absorb the pension).
• High-net-worth individuals who’ve deliberately preserved pensions as inheritance vehicles.

The new payment mechanism

Personal representatives (usually executors) become responsible for reporting and paying IHT on unused pension funds:

• The executor includes pension values on the IHT return.
• IHT must typically be paid within 6 months of death.
• A new “withholding notice” mechanism allows the personal representative to instruct the pension scheme to withhold up to 50% of the pension funds for up to 15 months from death.
• Until IHT is paid, beneficiaries cannot receive more than 50% of their entitlement (with carve-outs for spouses, civil partners, charities, etc.).

This withholding mechanism is designed to prevent beneficiaries drawing the pension and dissipating the funds before IHT is paid.

How the maths works

A worked example for a single (widowed) person dying in 2027/28:

Estate composition:

• House: £400,000.
• ISA + savings: £150,000.
• DC pension: £400,000.
• Total estate value (new rules): £950,000.

Available nil-rate bands:

• Personal nil-rate band: £325,000.
• Residence nil-rate band: up to £175,000 (subject to estate value taper).
• Total: £500,000.

IHT calculation:

• Estate value: £950,000.
• Less available nil-rate bands: £500,000.
• Taxable: £450,000.
• IHT at 40%: £180,000.

Under the pre-April-2027 rules:

• Pension outside estate: £400,000 excluded.
• Estate value: £550,000.
• Less nil-rate bands: £500,000.
• Taxable: £50,000.
• IHT at 40%: £20,000.

Net effect of the change for this estate: £160,000 more IHT.

On top of the income tax — the “double tax” concern

After IHT, the beneficiary inheriting the pension still faces income tax when they draw it (under the pre/post-75 rules):

• If the deceased was under 75 at death: pension withdrawals to beneficiaries are tax-free up to the Lump Sum and Death Benefit Allowance (£1,073,100).
• If the deceased was 75 or over at death: withdrawals are taxed as the beneficiary’s income at their marginal rate.

So for an over-75 death where the beneficiary is a higher-rate taxpayer:

• Pension faces IHT at 40% on the estate side.
• Beneficiary then faces 40% income tax on the residual pension as they draw it.
• Combined effective tax can approach 64% (40% IHT, then 40% of the remaining 60%).

For a typical over-75 death with a £200,000 pension passing to a higher-rate-paying adult child:

• IHT (if estate is over allowances): £80,000.
• Income tax on remaining £120,000 drawn: £48,000.
• Net to beneficiary: £72,000 of an original £200,000 pension. Effective tax: 64%.

This compounding has prompted industry calls for the rules to be reworked — particularly the carve-out of post-75 income tax. As at May 2026 the rules stand as outlined.

Planning responses

A range of legitimate planning responses are being discussed:

1. Drawdown rather than preserve

Pension preservation as inheritance now costs more. For older savers who don’t need the income but were saving it for heirs, drawing income gradually and gifting may be more efficient — using:

• The 7-year IHT rule for outright gifts.
• The £3,000 annual gift exemption.
• Gifts out of regular income (no limit if from surplus).
• See our gift tax-free guide.

2. Spouse transfers

For married couples, the spouse exemption continues. Planning that channels pension to the surviving spouse before death (where possible) preserves the full IHT exemption.

3. Charitable giving

For charitably-inclined wealthy savers, leaving pension to charity preserves IHT exemption and supports causes. The estate also benefits from the reduced 36% IHT rate if 10%+ of net estate goes to charity.

4. Spend rather than preserve

A behavioural shift: spend the pension on your own retirement (the original purpose) rather than treating it as a wealth-transfer vehicle. This is particularly relevant for healthy retirees who’d previously been over-saving.

5. Life insurance written in trust

For estates expecting significant IHT liability, life insurance held in trust outside the estate can fund the IHT bill. This isn’t directly affected by the pension changes but becomes more relevant as IHT liabilities rise.

What hasn’t changed

The April 2027 changes don’t affect:

• State Pension: not subject to IHT (it ends at death).
• Defined benefit (DB) pension survivor pensions: continuing income to spouse / dependants under scheme rules, not part of estate.
• The 25% tax-free lump sum during life: still available from age 55 (rising to 57 in 2028).
• Inter-spousal pension nominations: still IHT-free.

What you can do before April 2027

If you’re likely to be affected:

1. Review your expression of wish for each pension you hold.
2. Update beneficiary nominations to reflect optimal IHT positioning (spouse first where applicable; consider charitable gifts).
3. Stress-test your estate at the April 2027 rules — if your estate exceeds available nil-rate bands, model the IHT change.
4. Speak to a regulated financial planner or solicitor if your estate is large enough to be affected.
5. Don’t panic-restructure — many estates remain well within allowances; the change affects a minority of larger estates.

Internal links

• What happens to my pension when I die?
• How much can I gift tax free UK?
• What is the 25 percent tax free pension lump sum?

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This guide is information, not regulated financial advice. The April 2027 IHT changes are complex and interact with non-dom transitional rules — speak to a regulated estate-planning adviser if your estate may be affected. Verified against HMRC: Inheritance Tax on unused pension funds and death benefits on 23 May 2026.