Pensions have long been a tax-efficient way to pass on wealth, but that is about to change. From April 2027, undrawn pension funds will fall within the scope of inheritance tax for the first time, with significant implications for estate planning, probate, and the role of personal representatives.
In this blog, our private client team looks at the upcoming changes and how the new rules may affect your estate.
What’s Changing for Pensions and Inheritance Tax?
From 6 April 2027, undrawn funds left in defined contribution pensions will be treated as part of a deceased person’s estate for inheritance tax purposes. This marks a significant shift in how pension wealth is handled on death and is expected to push more estates over the £2 million threshold where the residence nil rate band (RNRB) begins to taper. Larger estates may therefore face higher inheritance tax (IHT) bills, and in some cases, the inclusion of pension wealth may reduce or eliminate valuable tax reliefs such as the RNRB. However, some important exemptions, such as the spouse/civil partner and charity exemptions, may continue to apply in specific circumstances.
You can read the government’s policy paper on the changes here: Gov.UK: Inheritance Tax — unused pension funds and death benefits.
Which Pensions Are Affected by the April 2027 Changes?
A defined contribution (DC) pension, sometimes called a money purchase scheme, is a private or workplace pension that you or your employer pays into. Individuals may contribute regularly or as permitted by the scheme rules, with the value ultimately depending on contributions and investment performance.
Defined contribution pensions may include:
- Workplace pensions set up through an employer
- Personal pensions arranged by individuals
From April 2027, the remaining undrawn funds in these pensions become part of your estate for IHT calculations, a significant change from the previous rules.
Who Is Responsible for Paying the Inheritance Tax?
Personal representatives (PRs), usually the executors or administrators of the estate, will be responsible for reporting and paying IHT due on unused pension funds. Pension beneficiaries will be jointly and severally liable for any inheritance tax on pension or death benefits from the point of appointment. Pension scheme administrators (PSAs) must inform beneficiaries about any potential IHT on non-exempt benefits and explain available options for meeting the tax liability.
Pension Withholding Rules, Payment Deadlines, and Liquidity Issues
To help PRs manage liquidity when settling IHT, PSAs can be directed to withhold up to 50% of benefits (minimum £1,000) for up to 15 months from death. PRs can also instruct PSAs to pay IHT (and any interest) directly to HMRC within 35 days of receiving a notice. PSAs that fail to comply with a valid notice can become liable for the unpaid tax. These measures are particularly relevant where pension assets are illiquid, such as commercial property held within SIPPs or SSASs, as meeting payment deadlines may be challenging. At the time of writing, there is no instalment payment facility or statutory loss-on-sale relief for disposals of illiquid pension assets.
PSAs are expected to provide the value of unused pension funds to PRs within four weeks of being notified of the death. They must also indicate the split between exempt and non-exempt recipients and, on request, provide beneficiary details to help fulfil IHT reporting requirements, although there are no fixed timelines for these latter steps. The usual six-month statutory period to pay IHT remains unchanged.
Available Tax Reliefs, Exemptions, and Common Pitfalls
If the deceased was aged 75 or older, any withdrawals by individuals from inherited pension pots are taxed at the beneficiary’s marginal income tax rate. Payments to trusts are subject to a 45% special lump sum death benefits charge (“SLSDBC”). To prevent double taxation when pension funds are used to settle the IHT liability, the Income Tax (Earnings and Pensions) Act 2003 will be amended to provide relief, ensuring that income tax is not charged again on money used to pay IHT or to reimburse PRs. Trusts may also be eligible for relief on SLSDBC in this context.
The spouse/civil partner exemption and the charity exemption will continue to apply to pension death benefits, in line with other estate assets, even where there is trustee discretion over payment.
It’s important to note that Agricultural Property Relief (APR) and Business Property Relief (BPR) will not apply to assets held within pensions, even if the underlying investments might have qualified if owned outright.
Planning ahead for the 2027 changes? Our private client team can review your existing arrangements and advise on how the new rules may affect your estate. Get in touch with our private client lawyers to discuss your position.
Probate, Estate Administration, and Practical Considerations
PRs must now integrate pension valuations and splits between recipients into the IHT account and timetable within six months, coordinating with multiple pension administrators as required. Early engagement with PSAs is essential, especially when considering whether to issue withholding notices or direct-payment instructions to address potential liquidity concerns, taking into account the limits of the 15-month withholding period and the 35-day payment window. In cases where new pension wealth pushes an estate above £2 million, PRs should consider the risk to RNRB entitlement and factor this into estate planning.
Clearance certificates will protect PRs from liability for pension funds discovered after HMRC clearance has been obtained, provided any omission was not due to carelessness. However, if further tax is due on pension assets identified later, PRs must still calculate and settle the increased liability.
In estates that would otherwise not require a grant of probate (for example, where assets pass automatically to a joint owner), a grant may now be necessary solely to deal with IHT on pension wealth, unless exemptions apply.
Practical Steps for Executors and Beneficiaries
- Engage with pension scheme administrators early in the administration process (ideally within the first six months) to confirm valuations, recipient status, and beneficiary information for IHT filings.
- Assess whether to issue a withholding notice or direct-payment direction to manage liquidity and exposure, bearing in mind the statutory caps.
- Review the risk of losing the RNRB and obtain advice where including pensions, which might push the estate above the £2 million threshold.
- Ensure income tax and IHT consequences on death benefits are co-ordinated, making use of available reliefs as appropriate.
- Look out for further details in secondary legislation and HMRC guidance, especially regarding verification before a grant is issued and the practicalities of PSA information sharing.
Contact Our Private Client Lawyers – The Law Firm on Baker Street
The April 2027 pensions changes will affect many estates, and early planning is the best way to protect what you intend to pass on. Whether you are reviewing your own arrangements or acting as an executor preparing for the new rules, our private client lawyers can help you understand the implications and plan with confidence.
Muscatt Black Graf is a long-established specialist law firm on Baker Street, London. Our highly experienced lawyers pride themselves on exceptional client care and straightforward advice.
For more information on how we can help, please call 0207 586 1141 or email contact@muscattblackgraf.com, or alternatively, fill in our online contact form.
This blog was prepared and published in May 2026 for general information purposes only. It does not constitute legal, tax, or financial advice and should not be relied upon as such. Specific advice should always be sought based on your individual circumstances.