HMRC has released fresh details on sweeping changes to inheritance tax rules that will significantly affect how pensions are treated after death, marking one of the biggest shifts in estate planning in recent years.
From April 6 2027, most unused pension funds and pension death benefits will be counted as part of a person’s estate for inheritance tax (IHT) purposes, a move that could impact thousands of families across the UK.
What’s changing for pensions and inheritance tax?
Under current rules, pension pots are typically excluded from inheritance tax calculations, making them a popular and tax-efficient way to pass on wealth. However, the government says this has led to pensions being used less for retirement income and more as a tool for estate planning.
The new rules will change that.
From April 2027:
- Most unused pension funds will be included in the total value of an estate.
- Pension death benefits will also fall within the scope of inheritance tax.
- This means estates exceeding the tax-free threshold could face a 40% tax charge on pension assets.
The shift represents a major policy change aimed at tightening tax rules and limiting what the government sees as unintended use of pension schemes.
A growing administrative burden for families
One of the biggest concerns raised so far is the practical challenge for families dealing with estates.
Personal representatives, the individuals responsible for managing a deceased person’s affairs will now be required to:
- Identify all pension savings held by the deceased.
- Contact pension providers and insurance schemes.
- Accurately value those pensions for tax purposes.
- Ensure any inheritance tax due is paid.
HMRC has said representatives must take “reasonable steps,” but has not yet clarified exactly what this involves in practice.
Legal experts warn this could become complicated, particularly where individuals have:
- Multiple pension pots across different providers.
- Old workplace schemes.
- Digital accounts that may be difficult to access without passwords.
How income tax will apply to inheritance tax
The interaction between inheritance tax and income tax is also changing.
Currently:
- Pension funds inherited after age 75 are not subject to inheritance tax.
However, withdrawals by beneficiaries are taxed as income.
From April 2027:
- Inheritance tax will be applied first to pension funds included in the estate.
- Beneficiaries will then pay income tax only on the remaining amount.
This adjustment is designed to prevent what HMRC describes as a “double tax hit,” though it still means overall tax exposure could increase.
New withholding rules introduced
While the six-month deadline for paying inheritance tax after death remains unchanged, HMRC is introducing a new safeguard.
Executors will be able to:
- Instruct pension providers to withhold up to 50% of lump sum death benefits.
- Delay payouts for up to 15 months while tax liabilities are calculated and settled.
Additionally, pension providers may be asked to pay inheritance tax directly to HMRC on behalf of the estate.
This aims to prevent situations where funds are distributed before tax obligations are met.
Key exemptions still in place for inheritance tax
Despite the changes, several important exemptions will remain:
- Married couples and civil partners can still combine their tax-free allowances, potentially passing on up to £1 million without IHT.
- Most “death in service” benefits are expected to remain exempt, though they may need to be reported.
- Joint life annuities and dependants’ scheme pensions will also not be affected by the new rules.
These exemptions mean that while the scope of inheritance tax is expanding, some protections for families remain intact.
Timeline for the inheritance tax changes
HMRC is continuing to refine the details, with further guidance expected over the coming months.
The current timeline includes:
- Spring 2026: Draft regulations on information sharing.
- Summer 2026: Formal regulations introduced.
- Late 2026 to early 2027: Draft guidance shared with industry.
- Spring 2027: Final guidance published ahead of implementation.
What it means for savers
For individuals and families, the changes signal a need to rethink long-term financial planning.
Pensions have long been seen as a tax-efficient way to pass on wealth, but this reform could reduce their attractiveness for inheritance purposes. Financial advisers are already urging people to review their estate plans, particularly if they have significant pension savings.
