HMRC Pension Inheritance Tax Changes From April 2027
For decades, unused pension funds were one of the most effective — and widely used — tools in UK estate planning. That is about to change.
Under the Finance Act 2026, which received Royal Assent on 18 March 2026, most unused pension funds and pension death benefits will be brought within the value of a deceased person's estate for Inheritance Tax (IHT) purposes from 6 April 2027. HMRC published a detailed technical note on 11 May 2026, updated on 29 May, setting out exactly how the new rules will operate in practice. Draft information-sharing regulations followed on 18 May 2026.
The changes represent the most significant shift in pension succession planning in a generation.
Why Pensions Are Being Brought Into IHT
The policy rationale, as set out by the government across the Autumn Budget 2024 and subsequent legislation, is straightforward: pension schemes were increasingly being marketed and used as vehicles to transfer wealth between generations, rather than for their intended purpose of providing retirement income.
As Legal & General's adviser guidance noted, the change "has been introduced to prevent pension schemes from being increasingly used and marketed as a tax planning vehicle to transfer wealth" rather than fund retirement.
Under the current rules, unused defined contribution pension funds sit outside a person's estate on death, meaning they can be passed to beneficiaries free of Inheritance Tax — even for very large pension pots. From 6 April 2027, that position ends. Most unused pension funds — whether the pension scheme administrator has discretionary power over death benefits or not — will be treated as "notional pension property" owned by the individual immediately before death, and included in the estate's value for IHT purposes.
The government's own projections, published alongside the HMRC technical note, estimate the change will affect 10,500 additional estates paying IHT in its first year of operation — out of approximately 213,000 estates with inheritable pension wealth in 2027-28. That represents roughly 1.5% of total UK deaths. Most estates will continue to have no IHT liability. But the 10,500 families affected will face genuinely significant new tax bills.
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What the New Rules Mean in Practice
The HMRC technical note published in May 2026 sets out a two-stage process for how IHT on pensions will be calculated and collected.
Step one — valuation: The personal representative (typically a family member, friend, or solicitor appointed as executor) must identify all unused pension funds held by the deceased — including old workplace schemes, historic pension pots, and online-only accounts — and calculate their value as part of the estate.
PensionBee VP of Personal Finance Maike Currie, quoted in PensionBee's May 2026 press release, described the potential burden on families: "An admin nightmare is waiting in the wings for grieving families. Personal representatives will effectively become pension detectives, expected to track down old workplace schemes, historic pension pots and online-only accounts, often with incomplete records and missing passwords."
Step two — payment: Once the IHT liability is calculated, pension scheme administrators become responsible for reporting and paying any IHT attributable to the pension funds. The estate can also pay the liability directly. Where beneficiaries of the estate and beneficiaries of the pension are different people, the personal representative can reclaim a proportionate share of the IHT from pension beneficiaries.
According to Royal London's technical guidance, the IHT400 form process applies, with the pension scheme retaining funds until the liability is settled. HMRC's interactive tools and updated templates — designed to support personal representatives — are expected to be available by spring 2027.
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What Remains Exempt — and the Dual Tax Warning
Not all pension wealth will be caught by the new rules.
Death-in-service benefits will remain outside IHT. Pension transfers to a surviving spouse or UK-resident civil partner are also exempt from IHT — though they may still need to be reported to HMRC. Estates leaving at least 10% of their net value to charity may qualify for the reduced 36% IHT rate rather than the standard 40%.
Defined benefit pensions — such as final salary schemes — are largely unaffected because they cannot typically be passed on in the same way as defined contribution funds.
The more complex issue flagged by David Gray LLP's estate planning guidance is the potential for a dual tax charge where beneficiaries are over 75 and not married. In those cases, inherited pension payments can attract both IHT at 40% on the estate side and income tax on the beneficiary side — producing effective tax rates potentially reaching 67% on the inherited pension funds.
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What to Do Before April 2027
Individuals and families with significant pension wealth have approximately ten months to review their estate and succession planning before the rules take effect.
The key actions, as outlined by wealth management firm Arbuthnot Latham, include reviewing the size of unused pension funds relative to the nil-rate band and any available transferable allowances, assessing whether drawing down pension funds before death could reduce IHT exposure, considering charitable giving strategies to access the 36% rate, and reviewing the interaction between pension beneficiary nominations and the estate's overall IHT position.
HMRC's indicative timetable shows further draft regulations, guidance templates, and support tools will be published throughout 2026, with final operational guidance expected spring 2027. The law is confirmed — only the administrative mechanics remain subject to refinement.
Key Takeaways
- Finance Act 2026 (Royal Assent 18 March 2026) brings most unused pension funds into deceased estates for IHT from 6 April 2027.
- HMRC published its technical note on 11 May 2026 — updated 29 May 2026 — setting out how the rules will operate.
- Government estimates 10,500 additional estates will pay IHT in the first year — approximately 1.5% of UK deaths.
- Personal representatives must identify all pension pots as part of estate valuation — pension scheme administrators become liable for reporting and paying IHT attributable to pension funds.
- Death-in-service benefits and spouse/civil partner transfers remain exempt. Defined benefit pensions largely unaffected.
- Beneficiaries over 75 who are unmarried face a potential dual IHT and income tax charge — effective rate up to 67%.
- Further HMRC guidance, templates and tools expected throughout 2026 ahead of April 2027 implementation.
*This article is for informational purposes only and does not constitute financial or legal advice. Please consult a qualified financial adviser or solicitor for guidance specific to your circumstances.*
Sources
- GOV.UK — Inheritance Tax on Pensions: Technical Note (Published 11 May 2026, Updated 29 May 2026)
- PensionBee — Pensions and Inheritance Tax: HMRC Reveals More (14 May 2026)
- Royal London — IHT: Pension Death Benefits from April 2027
- Arbuthnot Latham — Upcoming Inheritance Tax Reform: 2026 Business Relief and 2027 Pension Changes
- David Gray LLP — Changes to Pensions and Inheritance Tax from 2027
