HMRC Inheritance Tax Changes 2027: Pensions in Your Estate

In one of the most significant shifts to UK inheritance tax policy in decades, Chancellor Rachel Reeves has confirmed that from 6 April 2027, unused pension funds and death benefits will be brought within the scope of inheritance tax for the first time.

This fundamental change will affect thousands of families across the UK. It may create substantial additional tax liabilities for estates that have carefully structured their wealth planning around the assumption that pensions sit outside the inheritance tax net.

Key Takeaways:

• From 6 April 2027: Most unused pension funds and death benefits will be included in your estate for Inheritance Tax purposes.
• Who is affected: Approximately 10,500 estates will become newly liable for IHT, and a further 38,500 will face higher bills.
• Double tax risk: If you die after age 75, your pension may face both IHT (40%) and Income Tax on withdrawals (up to 45%).
• Exemptions remain: Pensions passing to a spouse, civil partner, or charity remain IHT-free.
• Business Property Relief: Does not apply to pension assets, even if the underlying investments would qualify if held personally.

Last reviewed: July 2026

This guide explains the HMRC inheritance tax changes 2027, what they mean for your estate, and how you can plan ahead. For general inheritance tax guidance, see our inheritance tax guide.

The Scale of the Change

The government's impact assessment estimates that approximately 10,500 estates will become liable for inheritance tax purely because of the inclusion of pension wealth.

Beyond these newly liable estates, a further 38,500 estates that already pay some inheritance tax will face increased bills.

By the 2029-30 tax year, HM Treasury projects this measure will raise £1.46 billion annually.

The average additional inheritance tax liability for affected estates is estimated at around £34,000. However, this figure masks considerable variation.

Some estates will face marginal increases of a few thousand pounds. Others with substantial pension pots could face bills running into six figures.

The change disproportionately affects individuals who have been prudent savers throughout their working lives. They deliberately left pension funds untouched to pass to the next generation.

These figures are based on analysis of approximately 213,000 estates projected to hold inheritable pension wealth in 2027-28.

Over 49,000 estates in total will either pay inheritance tax for the first time or pay substantially more than under the previous rules.

Understanding What's Changing

Under current rules, which remain in force until 5 April 2027, most pension death benefits fall outside an individual's estate for inheritance tax purposes.

This means that when someone dies holding a defined contribution pension worth £500,000, that sum can typically pass to nominated beneficiaries without any inheritance tax charge.

From 6 April 2027, this differential treatment ends. Unused pension funds and most pension death benefits will be aggregated with all other assets to calculate the total value of the estate.

If that combined total exceeds the available inheritance tax thresholds, the excess will be taxed at the standard 40% rate.

The change affects defined contribution pension schemes, which are the most common type of workplace and personal pension in the UK today.

If the pension holder dies before fully drawing down their pension, whatever remains in the pot can typically be passed on. It is this "unused" pension wealth that will now be caught by inheritance tax.

From 6 April 2027, an individual is treated as beneficially entitled to "notional pension property" (NPP). This means that NPP will be treated as within an individual's estate for IHT purposes.

A limited number of benefits are excluded from the new rules. These include dependants' scheme pensions, trivial commutation lump sum death benefits, certain joint annuities, and death in service benefits.

The Double Tax Problem

Perhaps the most concerning aspect of the new rules is the potential for double taxation. This arises when death occurs after age seventy-five.

When someone dies before reaching seventy-five, their beneficiaries can typically draw down the pension pot completely tax-free.

When death occurs after seventy-five, beneficiaries must pay income tax at their marginal rate on any pension benefits they withdraw.

From April 2027, estates facing inheritance tax on pension wealth will see the pot subjected to a 40% inheritance tax charge first.

If we take £100,000 of pension wealth as an example, inheritance tax at 40% reduces this to £60,000.

If the deceased died after age seventy-five, that remaining £60,000 is then distributed to beneficiaries who must pay income tax on withdrawals at their marginal rate.

A higher-rate taxpayer paying 40% income tax would receive £36,000 net. An additional-rate taxpayer at 45% would receive just £33,000.

The effective combined tax rate reaches 64% for higher-rate taxpayers and 67% for additional-rate taxpayers.

Please note: This is an illustrative example based on current legislation and assumptions. Actual tax liabilities depend on individual circumstances, beneficiary tax positions, and future HMRC guidance.

HMRC has provided some initial clarification on this issue. The portion of the pension used to pay inheritance tax will not be subject to Income Tax.

However, the detailed mechanics are still to be confirmed, and further guidance is expected.

Who Will Be Affected

The change will have the greatest impact on individuals who have built substantial pension pots. They also possess sufficient alternative assets to meet their lifetime income needs without drawing down their pensions fully.

These are typically higher earners who have maximised pension contributions throughout their careers. They deliberately left pension pots untouched into their seventies and eighties with the explicit intention of passing tax-efficient wealth to children and grandchildren.

Middle-class families with modest estates may also be caught, particularly where the family home forms a substantial portion of the estate value.

Married couples and civil partners face somewhat different dynamics. Transfers between spouses and civil partners remain inheritance tax-free regardless of value. Unused nil-rate bands can be transferred to the surviving partner.

A couple with combined pensions of £600,000, a family home worth £650,000, and other assets of £150,000 would have a combined estate worth £1.4 million.

Under current rules, removing the £600,000 pension from the calculation would mean no inheritance tax at all. The £800,000 remaining estate falls below the £1 million combined allowances.

From 2027, the £400,000 excess would attract inheritance tax of £160,000.

Thresholds and Allowances: The Frozen Landscape

The standard nil-rate band has stood at £325,000 since 2009. It remains frozen at that level through to 5 April 2030.

The residence nil-rate band provides an additional allowance of up to £175,000 when a residence is passed to direct descendants.

The residence nil-rate band begins to taper away for estates valued above £2 million. It disappears entirely once the estate reaches £2.35 million for a single person.

For married couples and civil partners, these allowances can effectively be doubled. The surviving partner can claim any unused nil-rate band from the first death alongside their own.

This creates a combined nil-rate band of £650,000. Combined residence nil-rate bands can reach up to £350,000.

A couple could therefore shelter up to £1 million from inheritance tax when the second partner dies, provided the home passes to children or grandchildren.

Exemptions That Still Work

The spouse and civil partner exemption remains unlimited and absolute. Any assets passing to a surviving spouse or civil partner are entirely free from inheritance tax regardless of value.

Pension death benefits nominated to a spouse or civil partner will continue to pass inheritance tax-free even after April 2027.

Charitable legacies also remain fully exempt from inheritance tax. If you leave at least 10% of your net estate to charity, the inheritance tax rate on the remainder reduces from 40% to 36%.

Pension funds will fall within the "general" component of an estate. They can be taken into account when assessing eligibility for the reduced 36% IHT rate.

Lifetime gifts made more than seven years before death fall outside the estate entirely. These are known as potentially exempt transfers.

Business Property Relief and Agricultural Property Relief continue to apply to qualifying assets. However, these reliefs will not be available for pension assets.

The Administrative Challenges

Personal representatives face significant new administrative burdens under the reformed system.

Currently, pension death benefits typically pass directly from the pension scheme to nominated beneficiaries. The personal representatives dealing with the probate estate often have minimal involvement.

From April 2027, personal representatives become responsible for identifying all pension assets, obtaining valuations, reporting the value to HMRC, and ensuring inheritance tax is paid.

The liability for paying any IHT attributable to pension assets falls on the executors, notwithstanding that they do not actually own the property.

Pension scheme administrators must provide personal representatives with the IHT valuation of unused funds within four weeks of being notified of the death.

However, personal representatives may not know which pension schemes the deceased held, particularly old workplace pensions from decades ago.

Tracking down every pension pot could take months, yet inheritance tax becomes due within six months of death.

There are also liquidity challenges. Inheritance tax must typically be paid before probate is granted, yet many assets cannot be accessed to fund the tax payment until after probate.

HMRC has introduced provisions allowing beneficiaries to instruct pension schemes to pay inheritance tax directly to HMRC from the pension pot. This solves the liquidity problem.

However, beneficiaries become jointly and severally liable with personal representatives for inheritance tax on pension assets. HMRC can pursue either the estate or the beneficiaries for unpaid tax.

Strategic Planning Before April 2027

With just over a year remaining before the changes take effect, individuals with substantial pension wealth should urgently review their estate planning arrangements.

One option is to begin drawing down pension funds more quickly than originally intended. You can use the tax-free cash allowance and take taxable income while managing the income tax liability.

Money genuinely spent is removed from the estate entirely. Money gifted becomes a potentially exempt transfer and falls outside the estate after seven years.

Even if death occurs within seven years, the gift may benefit from taper relief, reducing the inheritance tax charge.

Please note: These are potential planning options rather than universal recommendations. Suitability depends on personal circumstances. Regulated financial or tax advice should be obtained before taking action.

Life insurance offers another planning opportunity. A whole-of-life insurance policy written in trust can provide a lump sum on death that passes directly to beneficiaries outside the estate.

This lump sum can be used to fund an anticipated inheritance tax bill. Policies are generally cheaper when taken out at younger ages.

Reviewing death benefit nominations is essential. Nominating a spouse or civil partner will continue to shelter benefits from inheritance tax entirely. Nominations to children or grandchildren will create an inheritance tax charge from April 2027.

For those with multiple pension pots, consolidation might make sense for administrative simplicity. However, older pensions sometimes have valuable guarantees that would be lost on transfer.

Professional financial advice is essential before making any transfers, particularly for defined benefit pensions.

HMRC's Continuing Guidance and Next Steps

Finance Act 2026 received Royal Assent on 18 March 2026. It makes changes to the Inheritance Tax Act 1984, Finance Act 2004, and Income Tax (Earnings and Pensions) Act 2003.

These changes bring reforms to Inheritance Tax on pensions into effect for deaths on or after 6 April 2027.

Finance Act 2026 will be supported by secondary legislation. This will primarily cover the necessary information sharing requirements between personal representatives and pension scheme administrators.

Draft regulations were shared for a short technical consultation. The government is expected to lay the regulations later in 2026.

Further guidance and other supporting materials will be updated and published for April 2027. This will include details on the evidence pension scheme administrators should request or accept from personal representatives.

Templates to use for withholding and payment of Inheritance Tax will be provided. Interactive tools to support personal representatives will also be developed.

The government's indicative timetable is as follows:

• Spring/Summer 2026: Make and lay regulations on information sharing requirements with a commencement date of 6 April 2027
• Autumn/Winter 2026/2027: Share draft guidance with industry stakeholders
• Winter/Spring 2026/2027: Communications activity to publicise upcoming changes to impacted groups
• Spring 2027: Publish guidance and other supporting materials

Final Thoughts

The HMRC inheritance tax changes 2027 represent a fundamental shift in how pensions are treated for tax purposes.

From 6 April 2027, most unused pension funds and death benefits will be included in your estate for inheritance tax.

Approximately 10,500 estates will become newly liable for IHT, and a further 38,500 will face higher bills.

This affects not just the wealthy but many middle-class families who have built modest pension pots alongside property wealth.

The key principles for planning are to understand your current position, consider drawing down pension funds strategically, review death benefit nominations, consider using life insurance to fund potential tax bills, and seek professional advice.

The spouse exemption remains powerful. Ensuring your partner receives pension benefits can defer tax until the second death.

Charitable giving can reduce the effective tax rate to 36%. Gifting from income and lifetime transfers remain valuable tools for removing wealth from your estate.

Further HMRC guidance and secondary legislation may be published before the reforms take effect in April 2027. Individuals should stay informed through official GOV.UK channels.

For a full view of your tax position, see our Income Tax Calculator and inheritance tax guide.

Official Sources and Further Reading

GOV.UK Official Guidance:

• Inheritance Tax on pensions: technical note - Detailed HMRC guidance on the 2027 changes
• Inheritance Tax: General guide - GOV.UK's comprehensive overview
• Inheritance Tax nil-rate bands - Current and future thresholds
• Check if you can get residence nil-rate band - Eligibility checker
• Pension Tracing Service - Find lost pensions

Professional Bodies:

• Society of Trust and Estate Practitioners (STEP)
• Chartered Institute of Taxation (CIOT)
• Institute of Chartered Accountants in England and Wales (ICAEW)

This guide provides general information about the HMRC inheritance tax changes 2027. Individual circumstances vary significantly. For personalised advice about your specific situation, consult a qualified financial adviser, tax adviser, or solicitor. Always check GOV.UK for current rates and guidance.