The rules for how unused pension funds and death benefits are treated for Inheritance Tax (IHT) are changing from 6 April 2027. These changes could mean more estates will pay tax, and families need to be ready.
What is Changing from April 2027?
From 6 April 2027, most unused pension funds and pension death benefits will be treated as part of a person’s estate for IHT purposes. This is a major change because, under the current rules, many pensions are not included in an individual's estate while calculating IHT liability.
Executors (the personal representatives of the estate) will have to include the value of these pensions in the IHT calculation and pay any tax due.
Additionally, pension scheme administrators will be required to report details of unused pension funds and death benefits to HMRC and, in many cases, calculate and pay any inheritance tax due on these benefits.
Which Pensions and Benefits will be Taxed Under the New Rules?
Currently, many pensions are outside the IHT net. From April 2027, they will be included.
The change will mainly affect:
- Defined contribution (money purchase) pensions: such as personal pensions or workplace schemes where funds build up in an individual pot.
- Discretionary pension death benefits: where trustees or scheme managers decide who receives the money.
- Non-discretionary schemes: these are already taxable but will now be subject to the same reporting and payment rules as discretionary schemes.
- Defined benefit, defined contribution, UK registered schemes, and QNUPs (Qualifying Non-UK Pension Scheme): unused funds or death benefits will be included.
This treatment will apply equally to discretionary and non-discretionary schemes.
Which Pensions and Benefits Will Remain Exempt?
Some pensions and benefits will continue to fall outside IHT:
- Death in service benefits payable from both discretionary and non-discretionary registered pensions schemes: lump sums paid when someone dies while still employed will stay tax-free.
- Certain defined-benefit dependants’ pensions: regular payments to a surviving spouse or dependent from a defined-benefit scheme will not be included.
- Transfers to a spouse or charity: even after 2027, if the pension is left to a spouse, civil partner, or charity, it remains exempt from IHT.
Also, many estates that remain under the IHT nil rate band will pay no tax even after this change.
Will this Affect How Beneficiaries Receive Pensions?
Yes. Beneficiaries may now face inheritance tax being deducted from the estate before they receive their pension death benefit.
However:
- If the benefit is paid to a spouse, civil partner, or charity, it will remain exempt.
- For other beneficiaries, inheritance tax will be charged at 40% on any amount above the available allowances, or the nil rate band.
- If the pension scheme member dies after age 75, income tax will also apply to the pension withdrawal in addition to inheritance tax. This combination could result in high effective tax rates.
How Reporting and Payment for Pension Inheritance Tax Will Work from April 2027
Requirement | Details |
|---|---|
Reporting by pension scheme administrators | They must report unused pension funds and death benefits to HMRC. |
Calculation and payment of IHT | Pension scheme administrators must calculate and pay any inheritance tax due on these benefits. |
Exemption from reporting | No report is required if no IHT is due, but administrators must still coordinate with personal representatives to confirm this position. |
Nil rate band allocation | The nil rate band will be apportioned proportionately between pension benefits and other estate assets. |
Executor’s responsibility | Personal representatives must:
|
Payment deadline | IHT must be paid within six months after the end of the month of death; late payment interest will apply if delayed. |
Beneficiary liability | If IHT remains unpaid after 12 months, beneficiaries will become jointly liable with pension scheme administrators. |
Government’s Intent: The government says pensions should be for retirement, not a loophole to pass on wealth tax-free. Public-sector pensions already face inheritance tax, but many private pension pots don’t, creating an “unfair advantage.” By closing this gap, the reform is expected to pull around 10,500 new estates into inheritance tax and increase bills for 38,500 more, adding an average of £34,000. Still, most estates will remain under the tax threshold.
Source: Policy paper of HMRC on “Inheritance Tax on unused pension funds and death benefits” published on 21 July 2025.
Deadline to Prepare: These rules apply to deaths on or after 6 April 2027. Start planning now to minimise your IHT liability.
What Should You Do Before the Deadline?
If you have significant pension savings:
- Review your estate plan with a financial adviser or solicitor.
- Check your pension nominations to ensure they are up to date.
- Consider accessing or gifting pension funds during your lifetime to reduce potential IHT.
- Act early to avoid last-minute stress and unexpected tax bills.
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