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Pension inheritance-tax change (April 2027)

A change announced in the Autumn Budget on 30 October 2024 and enacted by the Finance (No. 2) Act 2025 that brings unused defined-contribution pension funds and most pension lump-sum death benefits within the scope of inheritance tax for deaths on or after 6 April 2027. Before that date, unused pension funds passed to nominated beneficiaries outside the estate and outside IHT regardless of the value of the rest of the estate. From the effective date, those funds are added to the value of the estate for the IHT calculation. [source: gov-uk/inheritance-tax-unused-pension-funds-2026-05-02.html]

What is in scope:

  • Unused funds in defined-contribution (DC) workplace pensions, SIPPs, and personal pensions.
  • Lump-sum death benefits from most DC schemes.
  • Certain DB lump-sum death benefits (pension protection lump sums and some categories paid after the member has left employment).

What stays out of scope:

  • Anything passing to a surviving spouse or civil partner — the standard spousal exemption removes the IHT charge entirely.
  • Anything passing to a registered charity — charity exemption.
  • Death-in-service lump sums from registered pension schemes (typically a multiple of salary, paid when the member dies in employment).
  • Ongoing dependants' pensions from defined-benefit schemes (income paid to a surviving spouse or dependant).
  • State Pension (it stops on death and is not an asset that passes).
  • Annuity continuation payments under pre-purchased guarantee periods or value-protected annuities.

Who is responsible for the IHT: the personal representative (executor or administrator) of the estate, not the pension scheme. This was the central change made between the original Budget proposal and the version enacted after consultation in July 2025. The personal representative reports the pension value on the IHT return, calculates the liability, and arranges payment. [source: gov-uk/inheritance-tax-unused-pension-funds-2026-05-02.html]

The withholding mechanism: where the personal representative reasonably expects IHT to be due on pension assets, they can direct the scheme administrator to withhold up to 50% of the death benefits for up to 15 months after the end of the month of death. The scheme then pays the IHT directly to HMRC from the withheld amount before releasing the balance to the beneficiaries. This avoids the alternative of the scheme paying out in full and then having to reclaim from beneficiaries. [source: gov-uk/inheritance-tax-unused-pension-funds-2026-05-02.html]

Government estimates (July 2025 consultation response): around 213,000 estates with pension wealth in 2027/28; approximately 10,500 face an IHT charge that they would not have faced under the old rules; around 38,500 estates pay more IHT in total. Average increase in liability where pensions are caught: around £34,000. Projected revenue to HM Treasury: £640 million in 2027/28, rising to £1.46 billion per year by 2029/30. [source: gov-uk/inheritance-tax-unused-pension-funds-2026-05-02.html]

Double-taxation risk for deaths after age 75: beneficiaries inheriting a DC pension from someone who died aged 75 or over already pay income tax on withdrawals at their marginal rate. From 6 April 2027 IHT may apply to the same pot before the beneficiary receives anything. The combined effective rate for a higher-rate beneficiary can reach around 64%. The government has acknowledged the overlap but as of 2026 has not announced a mechanism to prevent it. [source: gov-uk/inheritance-tax-unused-pension-funds-2026-05-02.html]

→ Pensions and inheritance tax: April 2027 changes · Inheritance tax