Inheritance Tax Changes 2027: What You Need to Know
How are pensions treated for Inheritance Tax today?
For around 40 years, death benefits from discretionary pension schemes have generally sat outside the scope of Inheritance Tax. This is because the scheme trustees decide who receives the money when a member dies. Members can state who they would like to benefit through an expression of wishes, but they cannot enforce an entitlement.
Because the member does not own the pension at death, it does not form part of their estate. That orthodoxy ends in April 2027, with significant implications for personal and family planning.
What changes on 6 April 2027?
From 6 April 2027, the value of an invested, unused pension at the date of death will be included in the Inheritance Tax calculation, like other assets. Trustee discretion and expressions of wishes remain; only the tax treatment changes.
IHT rates are unchanged. The standard rates continue to apply.
Allowances still apply. Estates can still use the nil-rate band and residence nil-rate band where available, although sharing these between the pension and the wider estate adds complexity.
The spousal exemption is available. Pension death benefits passing to a spouse or civil partner may qualify for the exemption where it applies.
Personal representatives are responsible. In the ordinary course of events, they will report the pension and arrange payment of any tax due.
Do the age 75 rules still apply?
Yes. The 'pension freedoms' introduced in 2015 made flexible drawdown widely available, created beneficiary drawdown, and reduced several other death-related tax charges. Under those rules, if a member dies before age 75, beneficiaries can generally receive the pension free of tax. If the member dies after age 75, beneficiaries generally pay Income Tax on what they draw.
These pre- and post-75 rules continue alongside the new IHT treatment. Where a member dies after 75, the same pension wealth could therefore be subject to both Inheritance Tax and Income Tax.
How many estates will be affected?
The Government estimates that around 213,000 estates with inheritable pension wealth will arise in 2027/28. Of these, around 10,500 are expected to become liable to IHT for the first time, and a further 38,500 are expected to pay more. That is around 49,000 estates in the first year, although the real number will depend on how people respond.
The Office for Budget Responsibility (OBR) estimates the changes could raise around £1.5 billion a year by 2029/30. For context, total IHT receipts are currently around £9 billion. Recent changes to Agricultural and Business Property Relief show how hard it is to model the effect of changes to death duties, so these figures should be treated as estimates.
What knock-on effects could the changes have?
Beyond the extra tax itself, two wider effects are worth knowing about:
A reduced residence nil-rate band. The residence nil-rate band tapers away for larger estates. Adding a pension to the estate could push it over the threshold, reducing or removing this allowance.
Funding the tax bill. If an estate or pension holds illiquid assets, such as property or business assets, you may need broader planning to raise cash to pay IHT.
What should you be reviewing now?
With the changes due in April 2027, review how your pension fits within your wider estate plan. Points to discuss with an adviser include:
whether your expression of wishes is up to date
how your pension and other assets together compare with the IHT allowances
whether your estate is close to the residence nil-rate band taper
how any IHT would be paid if your estate or pension includes illiquid assets
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From 6 April 2027, most unused pension funds and certain pension death benefits will be included in your estate for IHT. Whether tax is actually due depends on the total value of your estate, the allowances available and who inherits.
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Pension death benefits paid to a spouse or civil partner can benefit from the spousal exemption where it is available, as with other assets.
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In the ordinary course of events, the personal representatives of the estate are responsible for reporting the pension and arranging payment of any IHT due.
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The Government has confirmed that death-in-service benefits paid from registered pension schemes will be excluded from the new rules.
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Yes, potentially. If you die after age 75, beneficiaries generally pay Income Tax on what they draw, and this applies alongside any IHT due on the pension.
