UK pensions hit by IHT change

Published April 23, 2026 by The Daily Scout

- New UK rules will pull pensions into taxable estates starting in 2027, changing inheritance-tax treatment for savers. - Commentary warns this could expose pensions to up to a 40% inheritance-tax hit for affected estates. - Advisers and pensioners are reported to be considering gifting and other mitigations ahead of the rule change. ( )

Why it matters

Britain will start counting most unused pension pots as part of a dead person’s estate for inheritance tax from 6 April 2027. (gov.uk) The change was announced at the Autumn Budget on 30 October 2024 and confirmed in draft Finance Bill 2025-26 legislation published on 21 July 2025, with a further HM Revenue & Customs policy paper published on 26 November 2025. (gov.uk, gov.uk, gov.uk) Under the current system, many discretionary pension death benefits sit outside the estate for inheritance-tax purposes, while some non-discretionary schemes, including the NHS and judicial schemes, are already treated as part of the estate. (gov.uk) From April 2027, personal representatives, not pension schemes, will be responsible for reporting and paying any inheritance tax due on those pension assets. If they expect tax to be due, they can tell scheme administrators to hold back 50% of taxable benefits for up to 15 months from the date of death or pay HMRC directly before releasing the balance. (gov.uk) The headline rate has not changed: inheritance tax is still charged at 40% above the available tax-free bands. What changes is that pension wealth will now be added to the estate before those bands are tested. (gov.uk, gov.uk) Those bands are still frozen at £325,000 for the main nil-rate band and £175,000 for the residence nil-rate band, with the residence allowance tapering away once an estate exceeds £2 million. A qualifying estate can still pass on up to £500,000, or up to £1 million for some married couples and civil partners with transferred allowances. (gov.uk) The government says most estates still will not pay inheritance tax after the change. Its estimate is that, of about 213,000 estates with inheritable pension wealth in 2027-28, 10,500 will face an inheritance-tax bill that they would not have faced before, and 38,500 will pay more. (gov.uk, gov.uk) HM Revenue & Customs says the measure is meant to stop pensions being used as a tax-planning vehicle to transfer wealth and to align the treatment of different pension types. Advisers and law firms have said clients are now reviewing withdrawals, gifts and beneficiary arrangements before April 2027, though any gifting strategy still has to fit the seven-year inheritance-tax rules and the person’s retirement needs. (gov.uk, gov.uk, adviser.royallondon.com) Not every pension death payment is being swept in. Death-in-service benefits from a registered pension scheme are excluded from the estate from 6 April 2027, and HMRC also says the measure will not apply to exempt benefits funds under £1,000 or continuing annuities. (gov.uk) The practical effect is that a pension that once sat outside the inheritance-tax calculation may soon push some estates over a frozen threshold. For households that treated the pension pot as the last asset to touch, the calendar now matters as much as the balance. (gov.uk, gov.uk)

Key numbers

New UK rules will pull pensions into taxable estates starting in 2027, changing inheritance-tax treatment for savers.
Commentary warns this could expose pensions to up to a 40% inheritance-tax hit for affected estates.
( ) Britain will start counting most unused pension pots as part of a dead person’s estate for inheritance tax from 6 April 2027.
(gov.uk) The change was announced at the Autumn Budget on 30 October 2024 and confirmed in draft Finance Bill 2025-26 legislation published on 21 July 2025, with a further HM Revenue & Customs policy paper published on 26 November 2025.

What happens next

Britain will start counting most unused pension pots as part of a dead person’s estate for inheritance tax from 6 April 2027.
(gov.uk) From April 2027, personal representatives, not pension schemes, will be responsible for reporting and paying any inheritance tax due on those pension assets.
If they expect tax to be due, they can tell scheme administrators to hold back 50% of taxable benefits for up to 15 months from the date of death or pay HMRC directly before releasing the balance.

Sources

Quick answers

What happened in UK pensions hit by IHT change?

New UK rules will pull pensions into taxable estates starting in 2027, changing inheritance-tax treatment for savers. Commentary warns this could expose pensions to up to a 40% inheritance-tax hit for affected estates. Advisers and pensioners are reported to be considering gifting and other mitigations ahead of the rule change. ( )

Why does UK pensions hit by IHT change matter?

Britain will start counting most unused pension pots as part of a dead person’s estate for inheritance tax from 6 April 2027. (gov.uk) The change was announced at the Autumn Budget on 30 October 2024 and confirmed in draft Finance Bill 2025-26 legislation published on 21 July 2025, with a further HM Revenue & Customs policy paper published on 26 November 2025. (gov.uk, gov.uk, gov.uk) Under the current system, many discretionary pension death benefits sit outside the estate for inheritance-tax purposes, while some non-discretionary schemes, including the NHS and judicial schemes, are already treated as part of the estate. (gov.uk) From April 2027, personal representatives, not pension schemes, will be responsible for reporting and paying any inheritance tax due on those pension assets. If they expect tax to be due, they can tell scheme administrators to hold back 50% of taxable benefits for up to 15 months from the date of death or pay HMRC directly before releasing the balance. (gov.uk) The headline rate has not changed: inheritance tax is still charged at 40% above the available tax-free bands. What changes is that pension wealth will now be added to the estate before those bands are tested. (gov.uk, gov.uk) Those bands are still frozen at £325,000 for the main nil-rate band and £175,000 for the residence nil-rate band, with the residence allowance tapering away once an estate exceeds £2 million. A qualifying estate can still pass on up to £500,000, or up to £1 million for some married couples and civil partners with transferred allowances. (gov.uk) The government says most estates still will not pay inheritance tax after the change. Its estimate is that, of about 213,000 estates with inheritable pension wealth in 2027-28, 10,500 will face an inheritance-tax bill that they would not have faced before, and 38,500 will pay more. (gov.uk, gov.uk) HM Revenue & Customs says the measure is meant to stop pensions being used as a tax-planning vehicle to transfer wealth and to align the treatment of different pension types. Advisers and law firms have said clients are now reviewing withdrawals, gifts and beneficiary arrangements before April 2027, though any gifting strategy still has to fit the seven-year inheritance-tax rules and the person’s retirement needs. (gov.uk, gov.uk, adviser.royallondon.com) Not every pension death payment is being swept in. Death-in-service benefits from a registered pension scheme are excluded from the estate from 6 April 2027, and HMRC also says the measure will not apply to exempt benefits funds under £1,000 or continuing annuities. (gov.uk) The practical effect is that a pension that once sat outside the inheritance-tax calculation may soon push some estates over a frozen threshold. For households that treated the pension pot as the last asset to touch, the calendar now matters as much as the balance. (gov.uk, gov.uk)