Inherited Pensions Tax Rules 2027: What Will Change From April 2027?

The inherited pensions tax rules 2027 will introduce one of the biggest changes to the tax treatment of pensions on death in recent years.

From 6 April 2027, most unused pension funds and pension death benefits will be included in a deceased person’s estate when calculating Inheritance Tax (IHT).

This means pensions that have often been able to pass to beneficiaries outside the estate for IHT purposes could potentially increase the estate’s tax bill.

The change is no longer simply a proposal. The main provisions were enacted through Finance Act 2026, which received Royal Assent on 18 March 2026, and apply where the pension scheme member dies on or after 6 April 2027.

However, this does not mean every inherited pension will automatically face a 40% tax charge. Existing allowances, spouse and civil partner exemptions, the type of pension benefit and separate Income Tax rules can all affect how much tax is ultimately payable.

What Are the Inherited Pensions Tax Rules From 2027?

Under the new system, most unused pension wealth will be treated as part of the deceased person’s estate for Inheritance Tax purposes.

At present, many discretionary pension schemes can pass unused pension funds directly to beneficiaries without those funds forming part of the estate for IHT. From 6 April 2027, that advantage will largely disappear.

HMRC states that most unused pension funds and pension death benefits will be brought into the estate for deaths occurring on or after this date.

The basic change can be summarised as follows:

The reforms apply to deaths from 6 April 2027, rather than payments made after that date. If someone dies before 6 April 2027, the existing rules apply even if their beneficiaries receive their pension later.

Will Inherited Pensions Be Subject to 40% Inheritance Tax in 2027?

Not automatically.

The pension will generally be added to the value of the person’s other assets when determining the estate’s overall Inheritance Tax position.

The standard Inheritance Tax nil-rate band is £325,000. There is also a £175,000 residence nil-rate band in qualifying circumstances where a home is passed to direct descendants. These thresholds have been fixed at their current levels through 2030-31.

Inheritance Tax is normally charged at 40% on the  taxable portion of the estate above the available allowances, rather than at 40% of the entire inherited pension.

For example, imagine someone dies after 6 April 2027 with:

• £300,000 of other assets
• £200,000 of unused pension savings
• No spouse exemption
• No residence nil-rate band or other relevant reliefs

For this simplified example, the estate for IHT purposes would be approximately £500,000.

After applying a £325,000 nil-rate band, £175,000 could remain taxable.

At a 40% rate, that could produce an IHT liability of approximately £70,000.

Real estates can be considerably more complicated because liabilities, lifetime gifts, transferable allowances, property reliefs and exempt beneficiaries can alter the calculation.

Will Pensions Left to a Spouse Be Taxed From 2027?

Transfers to a qualifying spouse or civil partner can continue to benefit from the normal Inheritance Tax spouse exemption.

HMRC’s technical rules recognise exempt pension beneficiaries, including qualifying spouses and civil partners. Pension providers must identify amounts passing to exempt and non-exempt beneficiaries so the correct IHT treatment can be calculated.

This means the 2027 changes do not simply impose IHT whenever a surviving husband, wife or civil partner inherits a pension.

For example, if an individual leaves their remaining pension entirely to their qualifying spouse, the spouse exemption could mean no immediate Inheritance Tax is charged on that transfer.

Different considerations can arise when the pension subsequently passes from the surviving spouse to children or other beneficiaries following the spouse’s death.

Are Death-in-Service Benefits Included in the New Rules?

One important exception concerns death-in-service benefits.

Qualifying death-in-service benefits from registered pension schemes are excluded from the estate for the purposes of the new pension IHT rules. HMRC describes these as benefits connected with the person’s employment or qualifying work immediately before their death.

A typical example might be an employer providing a death-in-service benefit equal to three or four times the employee’s salary.

However, not every payment made by a pension scheme following the death of somebody who was working automatically qualifies.

For instance, a payment relating to a pension from a previous employer would not qualify as a death-in-service benefit simply because the individual was employed somewhere else when they died.

Which Pension Benefits Can Remain Outside Inheritance Tax?

Although most unused pension funds will come within the new regime, HMRC has identified several types of excluded benefits.

These can include qualifying:

• Death-in-service benefits
• Dependants’ scheme pensions
• Certain trivial commutation payments connected with dependants’ pensions
• Certain joint-life annuities
• Other specifically excluded pension benefits

A qualifying dependants’ scheme pension can therefore remain outside the deceased’s notional pension property for IHT purposes.

HMRC confirms that qualifying dependants can include spouses, civil partners, children and, depending on scheme rules and circumstances, financially dependent individuals.

The precise treatment will depend on the pension arrangement and the type of benefit being paid.

What Happens If the Person Dies Before Age 75?

The age-75 rules remain important because Income Tax and Inheritance Tax are separate taxes.

Under the pension Income Tax rules, if the pension member dies before age 75, qualifying pension income from certain survivors’ annuities and dependants’ drawdown funds is generally tax-free.

Lump-sum death benefits can also usually be tax-free where the relevant conditions and lump sum and death benefit allowance are satisfied.

From April 2027, however, the value of the pension may still need to be considered when calculating the deceased person’s estate for IHT.

Therefore, “tax-free because the person died before 75” should no longer automatically be interpreted as meaning the pension is entirely outside the inheritance tax system.

HMRC confirms that the existing age-based Income Tax treatment will continue alongside the new IHT rules.

What Happens If the Person Dies Aged 75 or Over?

Where someone dies at 75 or older, pension death benefits paid to an individual beneficiary are generally subject to Income Tax under the existing rules.

The beneficiary normally pays Income Tax according to their applicable marginal tax rate.

From April 2027, the same pension wealth could also form part of the deceased’s estate when determining IHT.

This creates the possibility that both taxes are relevant to the same inherited pension, although HMRC has introduced rules intended to prevent Income Tax being calculated on pension funds that have already effectively been used to meet the corresponding IHT liability.

Where IHT has been paid from the pension, the amount bearing that IHT can be excluded when determining the beneficiary’s taxable pension income.

Example

Suppose an individual dies aged 80 with a substantial unused pension.

The pension increases the estate sufficiently for an IHT liability to arise. Part of the inherited pension is then used to meet the pension’s share of that liability.

When the beneficiary subsequently receives taxable pension benefits, Income Tax should generally be calculated after taking account of the amount that bore the IHT charge, subject to the detailed HMRC rules.

This interaction makes inherited pensions after age 75 particularly important to consider as part of wider estate planning.

Who Will Report Inherited Pensions to HMRC?

The personal representatives of the deceased’s estate will have a central role.

This normally means the executors where there is a will or the administrators responsible for dealing with an intestate estate.

Personal representatives will need to identify the deceased’s pension arrangements, contact the relevant pension providers and obtain valuations and beneficiary information.

HMRC says personal representatives should take reasonable steps to identify pension schemes, including checking financial records and contacting relevant providers.

The pension administrator and personal representatives will also have information-sharing obligations designed to allow the correct IHT liability to be calculated.

Can a Pension Provider Hold Back Money for Inheritance Tax?

Yes, in certain circumstances.

Where a personal representative reasonably believes that IHT may be due, the rules allow them to issue a withholding notice to a registered pension scheme.

The notice can require the pension scheme administrator to temporarily withhold up to 50% of a beneficiary’s pension entitlement.

HMRC stresses that withholding is not intended to be routinely applied to every pension. Most estates will not owe IHT, so it is designed for situations where there is a reasonable expectation of a tax liability.

The mechanism is intended to prevent situations where an executor has to use other estate assets to pay tax attributable to pension wealth that has already been distributed to beneficiaries.

Could the 2027 Pension Rules Increase the Number of Estates Paying IHT?

Yes.

Because pension savings that were previously excluded can be added to the estate, some estates that would previously have remained below the IHT threshold could move above it.

Government estimates indicated that around 10,500 estates could become liable for IHT that would not otherwise have paid it, while approximately 38,500 estates could pay more IHT than under the previous system.

The government noted that these figures do not account for behavioural changes and should therefore be treated as an upper estimate.

The effect is likely to be particularly important for households with substantial:

• Defined contribution pension pots
• Property wealth
• Investments
• Savings
• Other inherited assets

Do Pension Beneficiary Nominations Still Matter?

Yes.

Pension holders should continue to keep their expression-of-wish or beneficiary nomination forms up to date.

The new IHT rules do not make beneficiary nominations irrelevant. Pension trustees and administrators may still need to determine who receives pension death benefits according to the scheme’s rules.

However, nomination alone will generally no longer be sufficient to keep an otherwise taxable pension outside the estate for IHT purposes after 6 April 2027.

This is a significant difference from previous estate-planning strategies where pensions were sometimes deliberately preserved while ISAs, cash and other taxable estate assets were spent first.

Should People Withdraw Their Pension Before 2027?

The changes do not mean everyone should immediately start withdrawing pension savings.

Taking additional pension income can create other consequences, including:

• Income Tax
• Loss of future tax-free pension growth
• Reduced retirement income
• Investment consequences
• Changes to estate value
• Potential effects on benefits or financial planning
• The risk of spending retirement funds too quickly

Whether drawing down a pension earlier is sensible depends on the individual’s age, income requirements, estate size, beneficiaries and wider retirement strategy.

For people with significant pension and property wealth, the new rules make it more important to assess pensions as part of the whole estate, rather than viewing the pension as an entirely separate inheritance vehicle.

What Should Pension Holders Check Before April 2027?

People preparing for the inherited pensions tax rules 2027 may want to review their arrangements before the reforms take effect.

Important areas include checking the value of all pension pots, ensuring beneficiary nominations are current, reviewing wills and estimating the total value of assets that could form part of the estate.

Married couples and civil partners may also want to understand how spouse exemptions and transferable IHT allowances interact with their pension arrangements.

People with larger or more complicated estates should consider regulated financial planning and specialist tax or estate advice rather than making pension withdrawals purely to avoid the new rules.

Conclusion

The inherited pensions tax rules 2027 fundamentally change the role pensions can play in estate planning. From 6 April 2027, most unused pension funds and pension death benefits will be included when calculating the deceased person’s estate for Inheritance Tax.

That does not mean every pension will suffer a 40% charge.

The £325,000 nil-rate band, possible residence nil-rate band, spouse and civil partner exemptions and exclusions for benefits such as qualifying death-in-service payments can significantly affect the final position.

The most important change is that pension holders can no longer assume their remaining pension pot will automatically sit outside their estate for Inheritance Tax purposes.

Frequently Asked Questions

Why is April 2027 important for pension inheritance?

From 6 April 2027, most unused pension funds and pension death benefits will be counted as part of the deceased person’s estate for Inheritance Tax purposes.

Does every beneficiary face a 40% tax charge?

No. Inheritance Tax is generally charged only on the taxable value of the estate after available allowances, exemptions and reliefs have been applied.

What happens if someone dies before the new rules begin?

If the pension holder dies before 6 April 2027, the current pension inheritance rules generally continue to apply, even if benefits are paid later.

Are husbands, wives and civil partners protected?

Transfers to a qualifying spouse or civil partner can normally benefit from the Inheritance Tax spouse exemption, which may prevent an immediate IHT charge.

Which pension payments may stay outside the estate?

Certain benefits, including qualifying death-in-service payments and some dependant benefits, can remain excluded under the new rules.

Why does the pension holder’s age at death still matter?

Age remains important for Income Tax. Pension benefits inherited after a death before age 75 can receive different tax treatment from benefits inherited after age 75.