Last reviewed: 11 June 2026
TL;DR- From April 2027, unspent pension pots will count toward your estate for inheritance tax purposes
- The nil-rate band remains at £325,000 (frozen to 2030); residence nil-rate band £175,000
- Pension funds previously sat outside IHT entirely under pre-2027 rules
- Affected: defined contribution savers with large unspent drawdown pots
- Action required: review nomination of beneficiaries and consider drawdown strategy
What HMRC Has Confirmed
HMRC published a technical consultation in May 2026 confirming the mechanism by which unused defined contribution pension funds will be brought into the inheritance tax calculation from 6 April 2027. The change was first announced at Autumn Budget 2024 and has now moved to the implementation stage, with scheme administrators liable for reporting and paying any IHT due.
Under the new rules, when a pension holder dies with unspent funds remaining in a defined contribution scheme, the pension provider must report the value to HMRC and will be jointly liable for paying inheritance tax on the portion that exceeds available nil-rate band allowances. The standard rate of IHT is 40 percent on the taxable estate above the threshold.
Who Is Affected
The change affects people who hold defined contribution pensions, including self-invested personal pensions (SIPPs), workplace money purchase schemes and personal pension plans, and who die with unspent funds remaining. Defined benefit (final salary) pensions pay as income rather than a lump sum pot and are treated differently.
Savers who have already moved into drawdown and have significant funds remaining are most exposed. Those who die before age 75 currently pass pension funds to beneficiaries free of income tax as well as IHT, a double benefit that disappears under the 2027 rules for the IHT element.
The Nil-Rate Band and What It Covers
Every individual has a nil-rate band of £325,000. Married couples and civil partners can transfer unused allowance to a surviving spouse, creating a combined threshold of up to £650,000. The residence nil-rate band adds a further £175,000 per person (up to £350,000 for couples) where a main home is left to direct descendants. Both bands are frozen until at least April 2030 under current government plans.
Pension funds will be added to the rest of the estate and the total assessed against available allowances. Existing exemptions, including gifts to spouses and gifts to charity, continue to apply to the pension element of the estate.
What Scheme Administrators Must Do
Pension providers will be required to assess the value of unspent funds, report the death to HMRC, calculate the IHT liability attributable to the pension, and pay that liability before releasing funds to beneficiaries. The six-month payment window that applies to the rest of an estate also applies to the pension component. Interest runs on unpaid IHT after the deadline.
Steps Worth Considering Before April 2027
Financial planners have identified several approaches worth reviewing in light of the rule change. Drawing down pension funds during retirement rather than preserving them as a tax-free inheritance vehicle removes the IHT exposure. Making gifts from pension income during lifetime uses the normal expenditure out of income exemption. Reviewing nomination of beneficiaries forms ensures pension trustees understand intent, though nominations remain discretionary and do not override IHT liability.
Anyone with a combined estate, including pension, likely to exceed the available nil-rate bands should consider speaking to a regulated financial adviser or tax specialist before the rules take effect.
Frequently Asked Questions
When do the HMRC pension IHT changes take effect?
The changes take effect from 6 April 2027 for deaths occurring on or after that date. Deaths before that date are assessed under the current rules, under which pension funds sit outside the estate for IHT.
Does the change affect defined benefit pensions?
No. Defined benefit schemes pay as income rather than leaving a capital pot, so they are not brought into the IHT calculation under these rules. The change applies to defined contribution pensions and SIPPs.
Can I avoid the IHT by leaving my pension to my spouse?
Transfers between spouses and civil partners remain exempt from IHT regardless of where the assets sit, including pension funds. The IHT exposure arises on the second death when funds pass outside the spousal exemption.
