What to know about inheritance tax changes and pensions from April 2027

From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person’s estate for inheritance tax purposes. Tracy Creed, a specialist in estate planning, probate and trust matters, and Partner and Head of the Private Client team at Sydney Mitchell, explains the changes.

What are the 2027 inheritance tax changes in relation to pension?

For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be treated as part of a deceased’s estate for inheritance tax (IHT) purposes, in-line with changes announced by the government in the Autumn Budget 2024.

Many discretionary pension arrangements currently sit outside the estate for IHT purposes, even where the member leaves a large untouched fund. This has encouraged people to spend non-pension assets first during their lifetime, in an endeavour to preserve their pension as a tax-efficient way of providing for loved ones after their death.

The reform is intended to remove that distinction and align pension wealth within an estate more closely with other assets. It applies according to the date of death. If a person dies before 6 April 2027, the current rules continue to apply even where benefits are paid later to beneficiaries.

The changes represent a fundamental shift in the boundary between pension and estate planning. Personal representatives, namely the executors appointed in a will, or administrators appointed for an intestate estate, will be responsible for reporting estate values, including the value of any unused pension, and for paying any IHT due.

Additionally, pension scheme administrators will have substantial new information-sharing and payment responsibilities, but they will not generally bear primary liability for the estate’s IHT liability.

What will be included in the 2027 inheritance tax changes in relation to pension?

Broadly, the value of most unused funds and relevant death benefits will be brought into the IHT calculation. This is likely to capture:

- uncrystallised defined contribution pots
- remaining drawdown funds
- many lump-sum death benefits

The amount included is determined under the statutory valuation rules and will need to be coordinated with information supplied by administrators of all relevant pension schemes.

However, there are some important exclusions to the changes, such as:

- death-in-service benefits payable from a registered pension scheme
- dependant’s scheme pensions from defined benefit arrangements
- collective money purchase arrangements and continuing annuities

Benefits passing to an exempt beneficiary, such as a those to a spouse, civil partner or charity, may also benefit from the usual IHT exemptions. The classification of a benefit will therefore be crucial. What may appear to be similar-looking payments may receive different IHT treatment, depending on the scheme rules and statutory category.

Is the wider inheritance tax framework remaining?

The changes do not create a separate pension tax rate. Pension values will be added to the rest of the estate’s assets and the usual IHT rules will then apply.

The standard nil-rate band remains at £325,000, and the residence nil-rate band remains at a maximum of £175,000 where a qualifying home passes to direct lineal descendants. Unused allowances may be transferable between spouses or civil partners.

The residence allowance tapers by £1 for every £2 by which the estate exceeds the £2 million threshold. Therefore, including pension values within the estate for IHT purposes may not only increase the taxable estate, but also reduce or eliminate the available residence nil-rate band allowance. Subject to exemptions and reliefs, the usual IHT rate of 40% will be payable on the estate value above available allowances.

How quickly is inheritance tax payable?

Unless instalment options are available on some of the tax falling due, IHT is payable within six months from the end of the month in which the death occurred. Interest will be applied where this payment is late.

Pension valuations are supposed to be provided to the personal representatives within 28 days of their request to the pension trustees. However, this is unrealistic, and valuations for the estate may not be finalised in a timely manner, particularly where several schemes are involved.

How will the changes affect will executors and administrators?

Personal representatives will sit at the centre of the new process. They must:

- identify all pensions, obtain values and benefit classifications from scheme administrators
- establish the recipients
- apply exemptions and reliefs
- include the relevant pension property in the IHT account

An estate having multiple schemes and beneficiaries may make the IHT calculation iterative, meaning that a scheme trustee may need estate information while the personal representatives need scheme information to finalise the estate calculations.

Where the personal representatives reasonably expect IHT to be due, they can direct a scheme administrator to withhold up to 50% of taxable benefits for up to 15 months from the end of the month in which the death occurred, and to pay the relevant IHT directly to HMRC before releasing the balance to beneficiaries. This mechanism is intended to address the cash-flow problem which can arise when pension assets sit outside the personal representatives’ direct control.

Whilst it is recommended that personal representatives make enquiries of pension scheme administrators immediately, it is unclear whether that will be achievable. Executors take their power as personal representatives from the date of the deceased’s death, however in intestate estates, administrators’ powers stem from the issue of the grant by the Probate Registry.

Personal representatives will need a clear audit trail of requests, valuations, evidence of exemptions, computations, directions and payments. Only after receiving HMRC clearance, can they be discharged from liability for pension benefits discovered at a later date, which is an important protection in complex estates. Until clearance is obtained, prudent personal representatives may want to consider holding an appropriate reserve and avoiding final distribution.

Summary

The upcoming April 2027 rules represent a fundamental shift in the boundary between pension and estate planning. For individuals, pensions can no longer be assumed to be an IHT ‘shelter’. For executors, pension discovery, valuation and tax funding will become core estate-administration tasks. For pension scheme administrators, death claims will require closer coordination with personal representatives and HMRC.

Early preparation is essential, but decisions should remain proportionate and flexible: each family’s tax exposure will depend on the whole estate, beneficiaries, exemptions, reliefs and pension benefit design.

HMRC has not yet released final guidance or the tools to assist with the application of their requirements, but it is hoped that the input provided by professional bodies will result in a clearer methodology and more realistic timelines for reporting and payment of IHT.

About the author

Tracy Creed has been practicing for over twenty-six years and deals with a broad spectrum of private client work from estate planning to probate and trust matters, and specialises in Continuing Healthcare funding (CHC). Tracy is named as a ‘Leading Partner’ in the latest (2027) edition of the Legal 500.

This article first published on The Gazette, the UK’s official public record. See: What to know about inheritance tax changes and pensions from April 2027 | The Gazette

What to know about inheritance tax changes and pensions from April 2027