TL;DR - IHT Pension Inclusion UK 2027
- From 6 April 2027, unused pension funds and death benefits will be included in the deceased's estate for inheritance tax (IHT) purposes for the first time
- Currently pensions sit outside the IHT estate - this exemption, which has existed since 2006, will end in April 2027 under Finance Bill 2025
- The standard IHT nil-rate band (£325,000) and residence nil-rate band (£175,000) still apply - only the portion of the estate above the available threshold is taxed at 40%
- Pension scheme administrators will become liable for paying IHT on pension funds before paying death benefits to beneficiaries - a significant administrative change
- Defined contribution (DC) pensions are primarily affected - defined benefit (DB) pension death benefits are more complex and may be treated differently depending on scheme rules
- An estimated 8% to 10% of estates that currently pay IHT will see increased bills - a smaller number of estates that currently do not pay IHT will be brought into scope
Last reviewed: June 2026 - Sources: HMRC, Finance Bill 2025, legislation.gov.uk
KEY FACTS - IHT PENSION INCLUSION 2027 | |
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The UK government announced in the Autumn Budget 2024 that unused pension funds will be brought within the scope of inheritance tax from 6 April 2027. This reverses a long-standing exemption that has made defined contribution pensions an attractive vehicle for passing wealth to beneficiaries free of IHT. The change was legislated through Finance Bill 2025 and confirmed following an HMRC consultation that closed in January 2025.
What Changes in April 2027
Under the current rules, defined contribution pension funds that remain undrawn at death sit outside the deceased's estate for IHT purposes. Beneficiaries receive the pension fund free of IHT - though income tax may apply when they draw from the inherited pension depending on whether the pension holder died before or after age 75.
From 6 April 2027, the value of unused pension funds will be added to the rest of the deceased's estate before applying the IHT threshold. The pension scheme administrator - not the executor of the will - will be responsible for calculating and paying the IHT attributable to the pension before distributing death benefits to beneficiaries.
Who Is Affected
The change primarily affects people who:
- Have significant accumulated pension savings in defined contribution schemes (workplace pensions, SIPPs, personal pensions)
- Have an estate (including the pension) that exceeds the available IHT threshold after all exemptions
- Have been using pension funds as a tax-efficient inheritance vehicle rather than primarily for retirement income
The government's own impact assessment estimated that around 8% to 10% of estates that currently pay IHT will see increased bills. A smaller number of estates that are currently below the IHT threshold may be brought into scope if large pension funds push the total estate above the nil-rate bands.
Married couples and civil partners can combine their nil-rate bands: £325,000 each plus £175,000 residence nil-rate band each (where applicable) = up to £1 million combined before IHT applies. Estates below these combined thresholds are unaffected.
Defined Contribution vs Defined Benefit Pensions
| Pension Type | IHT Treatment from April 2027 | Notes |
|---|---|---|
| Defined contribution (DC) Workplace DC, SIPP, personal pension | Undrawn funds included in IHT estate | Most significantly affected. Pension administrator pays IHT before distributing death benefits |
| Defined benefit (DB) Final salary, career average | Death benefits may be included - depends on scheme rules and discretionary trust status | More complex - lump sum death benefits held in discretionary trusts may be treated differently. Check scheme rules |
| State pension | Not affected - state pension does not form part of an estate | No change |
Illustrative Impact Examples
These are illustrative estimates only based on published nil-rate band figures. Individual circumstances vary significantly.
| Scenario | Estate + Pension | Threshold | Approx IHT bill change |
|---|---|---|---|
| Single, property + pension | £400,000 property + £200,000 pension | £500,000 (NRB + RNRB) | Previously £0 on pension. Now £80,000+ could be taxable at 40% |
| Married couple, full thresholds | £700,000 property + £250,000 pension | £1,000,000 combined | Below threshold - unaffected |
| Single, large SIPP | £300,000 property + £500,000 SIPP | £500,000 (NRB + RNRB) | £300,000 potentially taxable. Approx £120,000 IHT on SIPP portion |
Planning Considerations Before April 2027
Anyone with a large defined contribution pension and a significant estate should take qualified financial advice well before April 2027. Broad areas advisers typically consider include:
- Drawing down pension funds during lifetime to use IHT-exempt annual gifting allowances (£3,000 per year per person, plus potentially the £250 small gift exemption)
- Reviewing expression of wishes nominations on pension schemes - these do not constitute legally binding dispositions
- Considering whether pension funds should be drawn earlier and invested in other assets for estate planning purposes
- For married couples, reviewing the sequencing of asset transfers between spouses
HMRC guidance on the changes is published at gov.uk/guidance. Always take advice from a qualified financial adviser (FCA-authorised) and solicitor before making decisions based on tax planning.
Disclaimer: Kaeltripton.com is an independent editorial publisher. This guide is factual information only and does not constitute financial, tax, or legal advice. Tax rules are subject to change. Always consult an FCA-authorised financial adviser and a qualified solicitor for advice on estate and pension planning.
When do pensions become subject to inheritance tax?
From 6 April 2027 under Finance Bill 2025, unused defined contribution pension funds will be included in the deceased's estate for IHT purposes. Currently pensions are exempt from IHT - this exemption ends in April 2027.
How much inheritance tax will I pay on my pension?
IHT is charged at 40% on the portion of the total estate (including the pension from April 2027) that exceeds the available nil-rate bands. The standard nil-rate band is £325,000, with an additional £175,000 residence nil-rate band where a property passes to direct descendants. Married couples can combine thresholds up to £1 million. Amounts below the threshold are not taxed.
Are defined benefit pensions affected by the IHT changes?
Defined benefit pension death benefits may be affected depending on whether they are held in discretionary trusts and individual scheme rules. The position is more complex than for defined contribution pensions. Check your scheme's rules and take specialist advice.
What can I do to reduce the IHT impact on my pension?
Options that qualified advisers typically consider include drawing down pension funds during lifetime to make use of annual gifting allowances, reviewing expression of wishes nominations, and considering the sequencing of asset transfers between spouses. Take advice from an FCA-authorised financial adviser well before April 2027.
Sources: Finance Bill 2025 (legislation.gov.uk); HMRC Inheritance Tax guidance (gov.uk/inheritance-tax); HMRC consultation on pension IHT (closed January 2025); Inheritance Tax Act 1984; HMRC nil-rate band figures 2026-27.
