Everything You Need to Know About the Pensions and Inheritance Tax Changes Happening from April 2027

From 6th April 2027, the rules around pensions and inheritance tax are changing. This is happening as a result of the Finance Act 2026, which received Royal Assent in March 2026.
Up until now, the value of any unused discretionary pension funds or pension death benefits have sat in something of a legal loophole and – in many cases – these have been held apart from the total value of an estate. Many pension schemes have not needed to be counted towards the total value of an estate, and have therefore been exempt from inheritance tax. This has made some kinds of pension schemes a very effective way of passing down wealth to family members.
However, in April 2027 the government will be closing this loophole, and estates with pension funds will need to be handled differently. The big change here is that most unused pension funds and pension death benefits will need to be included in the total value of an estate and will no longer be exempt from inheritance tax.

What exactly is changing?

Historically, the rules for inheritance tax meant that any funds held within pension schemes were not considered to be part of an estate in cases where the scheme trustees had discretion over who received the death benefits.

However, personal representatives for estates where the death occurs on or after 6th April 2027 will need to handle this differently. The person who has died will be considered to have had beneficial ownership over the 'notional pension property' before their death.

This means that the open market value of any unused pension funds and death benefits at the date of death will need to be reported to HMRC as part of the total value of the estate, regardless of whether or not the scheme is discretionary or non-discretionary.

Where the total value of the estate – including any unused pension funds and death benefits – is over the nil rate band, inheritance tax will be due. The nil rate band will be remaining at £325,000 per person until 5th April 2031. In eligible cases, this can be supplemented by the residence nil rate band of £175,000. However, the value of the residence nil rate band is tapered for estates worth more than £2 million. It's important to be aware of this, as estates are more likely to hit this £2 million threshold once pension funds must be included in the total value.

Does this affect estates that are already going through probate?

If you're currently acting on behalf of an estate, you might want to know whether that estate will be subject to these new rules if the winding up process hasn't been completed by next year.
The important date to keep in mind here is the date of death, not the date by which the process of administering the estate is finished or the date of any pension pay out. If someone dies before 6th April 2027, their estate will need to be administered in accordance with the current rules. This is the case regardless of how long it takes to administer the estate or when the pension pay out occurs. If someone dies on or after 6th April 2027, their estate will need to be administered in accordance with the new rules.

Are there exemptions?

Any assets that are passing to a surviving spouse or civil partner will remain exempt from inheritance tax on the first death, regardless of what those assets are or where they have come from. Any assets that pass directly to charity will also remain exempt. This includes any unused pension funds or death benefits that are passed on in this way.
There are a range of other exemptions to the new law, including:

• Death in service benefits from a registered pension scheme.
• Any dependants' pensions.
• Joint life annuities that have been bought alongside the member's own annuity.

If you're unsure whether something counts as an exemption in your specific situation – whether you're planning for the future of your estate or whether you're in the midst of administering an estate – please get in touch. We'll be able to talk you through the process and ensure that you know exactly where you stand.
However, it's important to keep in mind that the value of any pension funds are not eligible for agricultural property relief or business property relief.

Who will be responsible for reporting and paying inheritance tax on pension assets?

In England and Wales, the personal representatives of an estate will be responsible for reporting any pension assets alongside the value of the rest of the estate. They will also be responsible for managing the payment of any inheritance tax that may be due.

The Finance Act 2026 includes some practical support for personal representatives. Specifically, this will fall on pension scheme administrators. In situations where personal representatives can reasonably expect inheritance tax to be due on an estate, they will be able to instruct pension fund administrators to withhold 50% of any benefit entitlement for up to 15 months after the end of the month in which the death occurred. They can then request that pension administrators use these withheld funds to pay any inheritance tax that is due directly to HMRC before releasing any remaining funds to beneficiaries. However, it will not be possible for any excluded or exempt benefits to be withheld in this way.
The change in the law will unfortunately add to the workload of personal representatives, which may be something you wish to consider when it comes to deciding who to appoint as your executor. It's also likely that more personal representatives will need to seek professional support during the probate process.

Can the same assets be subject to inheritance tax and income tax?

The situation for pension scheme drawdown funds and beneficiaries will be staying the same as regards income tax. This means that any drawdown benefits will be tax-free for beneficiaries if the person who has died was under 75. However, if the person who has died was 75 or over, drawdown funds will be subject to income tax.
The new changes mean that from April 2027, the same pension funds could be subject to both inheritance tax and income tax.

What can you do to prepare for the change in law?

We know that a lot of people are concerned about the new rules and what they may mean for their estate. We think the positive thing to take from the changes ahead is that there is now a window of opportunity to review your plans for your estate before the new rules come in in April 2027.
For example, now might be the time to take professional advice and consider things such as your expression of wishes with your pension provider and, indeed, whether keeping funds within your pension is still the most efficient way to do things, or whether you might want to consider drawing down any pension funds to gift during your lifetime instead.
If you are thinking about refining plans for the future of estate, why not book a complimentary discovery call with us? We'll be able to help you determine the best way forward.

FAQs

What are the new rules for pensions and inheritance tax?

The rules for pension schemes and inheritance tax are changing. From April 2027, the majority of unused pension funds and death benefits will be subject to inheritance tax. Not only might this mean a larger inheritance tax bill for certain estates, it will also add to the workload and responsibility for personal representatives.

When do the rules about pensions and inheritance tax change?

The new rules for pensions and inheritance tax are being introduced as part of the Finance Act 2026. This has already received Royal Assent, and will come into effect for estates where the death occurs on or after 6th April 2027. Any estates where the death occurred before this date will be administered according to the current laws, regardless of how long it takes to administer the estate or when the pension funds are released.

Will all pension assets count towards inheritance tax under the new April 2027 rules?

Not all types of pension assets will need to be counted towards the total value of the estate in order to determine inheritance tax liability. There are certain exemptions, including death in service benefits.All assets (including pension assets) will also remain exempt from inheritance tax if they are left to a surviving spouse or civil partner, or to charity.

How can you reduce the amount of inheritance tax you pay on your pension under the new April 2027 rules?

The new rules for pensions and inheritance tax mean that many types of pension schemes will likely no longer be a tax-effective way of passing down wealth. If you are seeking to ensure your estate plans are tax-effective, you may wish to take up-to-date professional advice.