Inheritance tax on pensions from April 2027: what the change means for your estate

What changes on 6 April 2027

HMRC's published policy paper confirms that from 6 April 2027, most unused pension funds and pension death benefits will form part of a person's estate for Inheritance Tax purposes (HMRC, Inheritance Tax on unused pension funds and death benefits). This reverses the long-standing position under which most defined contribution (DC) pension wealth passed outside the estate, free of IHT, on the holder's death.

The change applies whether the pension holder dies before or after age 75. It applies to both defined contribution and most defined benefit lump sum death benefits. Dependant's scheme pensions, charity lump sums, and most discretionary lump sums paid from a registered pension scheme are within the new scope.

The IHT rate of 40% above the available nil-rate band (HMRC, Inheritance Tax overview) is unchanged. What changes is the size of the estate the rate applies to: pension wealth that was previously outside that calculation is now inside it.

How the calculation differs from the pre-2027 treatment

Under the pre-2027 rules, unused DC pension funds were typically held outside the estate by the pension scheme's trustees, who paid out at their discretion to nominated beneficiaries. The death benefit was free of IHT, and any income tax position depended on whether the holder died before or after age 75.

Under the April 2027 rules, the unused pension fund value is added to the deceased's estate. The estate then computes its total IHT liability against the available nil-rate band (£325,000) and residence nil-rate band (£175,000 where qualifying conditions are met, per HMRC, Residence Nil-Rate Band guidance). The income tax treatment of the pension drawdown remains separate from the IHT charge: a beneficiary may pay income tax on withdrawals from the inherited pension AND the estate may have paid IHT on the pension value at death.

The administrative responsibility for reporting and paying the IHT charge on the pension portion falls on personal representatives of the estate. Pension scheme administrators are expected to provide the necessary fund valuations to support the IHT return.

Who the change affects

The change affects any UK-domiciled individual who:

• Holds unused DC pension funds (SIPPs, personal pensions, workplace DC schemes) at death, AND
• Has a total estate (including the pension value) above the nil-rate band thresholds.

For a single person with no spouse, the basic threshold is £325,000, the Nil-Rate Band. Where a qualifying residential property passes to direct descendants, an additional £175,000 Residence Nil-Rate Band may apply, giving up to £500,000 IHT-free.

For a married couple or civil partners, transferable allowances mean the combined threshold can reach £1 million where both NRB and RNRB are passed between spouses and the RNRB taper does not apply. The RNRB tapers at £1 for every £2 above £2 million of net estate value; it is withdrawn entirely at £2.35 million (HMRC, Residence Nil-Rate Band guidance).

Pre-2027, a pension pot of £400,000 held outside the estate kept the estate below the £500,000 single-person threshold for a homeowner with a £200,000 property and £50,000 in other assets. Post-2027, the same household has an estate of £650,000, of which £150,000 is now within IHT scope.

Worked examples at different estate sizes

These figures illustrate the calculation under the April 2027 rules. They are not personal projections.

Single homeowner with £200,000 property, £50,000 other assets, £400,000 pension:

• Pre-2027 estate (excluding pension): £250,000. Below NRB. IHT: £0
• Post-2027 estate (including pension): £650,000. NRB £325,000 + RNRB £175,000 (property passes to direct descendants) = £500,000 IHT-free. Taxable estate: £150,000. IHT at 40%: £60,000

Married couple, £600,000 property, £100,000 other assets, £500,000 combined pensions, both have full NRB + RNRB available on the second death:

• Pre-2027 estate (excluding pensions): £700,000. Combined NRB + RNRB on second death: £1,000,000. Below threshold. IHT: £0
• Post-2027 estate (including pensions): £1,200,000. Combined threshold: £1,000,000. Taxable estate: £200,000. IHT at 40%: £80,000

Single estate, £1,500,000 property, £200,000 other assets, £800,000 pension:

• Pre-2027 estate (excluding pension): £1,700,000. NRB + RNRB = £500,000. Taxable: £1,200,000. IHT at 40%: £480,000
• Post-2027 estate (including pension): £2,500,000. RNRB fully tapered (above £2.35m). Available threshold: NRB £325,000 only. Taxable: £2,175,000. IHT at 40%: £870,000

The third example demonstrates the compound effect: the additional £800,000 in the estate not only attracts IHT itself but also pushes the estate above the RNRB taper threshold, removing the £175,000 RNRB and adding a further £70,000 of IHT on the existing assets.

Calculate Your Take-Home Pay Tax → (an IHT-specific calculator is on the planned tools list. Until it ships, the income tax calculator helps with the separate question of income tax on inherited pension withdrawals.)

What you can consider before April 2027

The administrative responsibility for the new charge sits with personal representatives. Pension scheme administrators will need contact details for personal representatives and visibility of the wider estate to support the IHT return. Holders of multiple pensions across several providers face additional coordination complexity at death.

Several factual planning considerations exist that an individual can review with a qualified solicitor or chartered tax adviser:

• Whether ensuring up-to-date beneficiary nominations on each pension remains appropriate under the new rules
• Whether the pension's role within the household's overall estate plan changes, for example the relative tax efficiency of drawing pension income vs preserving the pot for inheritance
• Whether life insurance written in trust (which sits outside the estate) becomes more useful as an IHT mitigation tool
• Whether the estate value would cross the £2 million RNRB taper threshold once the pension is added in

This article is informational. Estate planning involves regulated advice in many circumstances. Consult a qualified solicitor, accountant, or chartered tax adviser regulated by the FCA, ICAEW, ACCA, CIOT, or STEP before making decisions about pension drawdown, gifting, or trust structures.

Frequently asked questions

What date does the IHT-on-pensions change take effect?

6 April 2027. The change applies to deaths from that date onward (HMRC, Inheritance Tax on unused pension funds and death benefits).

Does the change apply to defined benefit pensions?

The change applies to most lump sum death benefits paid from registered pension schemes, including defined benefit lump sum death benefits. Dependant's scheme pensions paid as ongoing income from a defined benefit scheme are not within the new scope of the IHT charge; the underlying scheme commitment to pay the dependant continues to sit outside the estate.

Who pays the IHT on the pension portion of an estate?

The personal representatives of the estate are responsible for reporting and paying IHT, including the portion attributable to the unused pension. Pension scheme administrators are expected to provide the fund valuations needed for the IHT return.

Does inherited pension income still attract income tax under the new rules?

Yes. The IHT charge on the pension value at death and any income tax payable by a beneficiary on withdrawals from the inherited pension are separate. Where the pension holder died before age 75, beneficiary withdrawals remain free of income tax. Where the holder died at age 75 or later, beneficiary withdrawals are taxed at the beneficiary's marginal income tax rate. The April 2027 change adds IHT on top of this existing income tax treatment.

Where can I find further reading?

• HMRC consultation on Inheritance Tax on unused pension funds and death benefits: the policy paper
• HMRC Inheritance Tax overview: thresholds, rates, and reliefs
• HMRC Residence Nil-Rate Band guidance: RNRB qualifying conditions and the £2m taper
• HMRC pension tax guidance: income tax on pension withdrawals
• MoneyHelper pensions and retirement hub: independent consumer guidance from MaPS