Pensions and inheritance tax (IHT) from April 2027 – update

At the UK budget in October 2024, it was announced that most unused pension funds and death benefits would be brought into the IHT net. This represented a fundamental shift in policy as most pension schemes are discretionary and so currently do not form part of an individual’s estate for IHT.

The proposals were consulted on, refined, adjusted, and then legislated in Finance Act 2026.  The changes will take effect in relation to deaths on or after 6 April 2027.

More recently, HMRC has published a technical note (updated to 29 May 2026) setting out how it expects the new rules will operate in practice, as well as an indicative timetable for further guidance, supporting materials and support tools.

Summary of changes from 6 April 2027

The new legislation provides that, 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. In relation to money purchase schemes, NPP will be broadly anything left in the pension pot on death. For defined benefit schemes, it will be broadly lump sum payments or scheme continuation payments payable on the death of a member.

A limited number of benefits are not subject to IHT, being the following “excluded benefits”:

• A dependants’ scheme pension
• Trivial commutation lump sum death benefit
• Certain joint annuities
• Death in service benefits

The familiar exemptions from IHT such as the spouse/civil partner or charity exemptions will apply to NPP. However, the core IHT reliefs of agricultural and business property relief will not be available.

Any IHT due on the NPP must be paid to HMRC in line with the usual deadline – six months following the end of the month of death. There is no provision for instalment options even if the pension holds qualifying property.

A more technical but important point is that NPP will form part of the “general component” of the estate rather than being treated as a separate component in the same manner as say certain settled property or survivorship property.

Liability to IHT

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

The pension scheme administrator (PSA) can become liable in certain circumstances for instance if they were to pay out benefits in breach of a withholding notice or if they haven’t complied with a notice to make a payment to HMRC. The pension scheme trustees are not liable to pay IHT.

If, after IHT clearance has been granted by HMRC, further pensions are discovered, executors won’t be liable for IHT on those pensions provided they did not act carelessly when investigating the extent of the deceased’s assets originally.

Paying the IHT

The executors have the option of either settling the IHT due on the NPP from the general estate assets or from the NPP itself. Should the executors wish to pay the IHT from the NPP, there is a process that must be followed.

Withholding of benefits

If the executors have identified an IHT liability, or have reason to believe there is one, in respect of NPP they can issue a “withholding notice”, which is in a prescribed form, to the PSA asking them to withhold some of the pension benefits. Once this notice has been issued, the PSA cannot pay out more than 50% of the pension benefits to the beneficiaries.

The notice remains in place until the earliest of:

• Withdrawal of the notice by the executors
• When all the IHT plus interest on the NPP is paid
• 15 months after the end of the month in which the deceased died

While the window of 15 months gives a reasonable period of time, there is still a risk that the IHT has not been settled in full in that time. Depending on the complexity of the pension assets and other estate assets, this might not provide enough time to deal with valuations and agreement with HMRC.

Payment of IHT by the PSA

The executors and the beneficiary of the pension scheme can request that the PSA pays the IHT due on the NPP. This will be achieved by way of a “payment notice” to the PSA. Following receipt of the notice the PSA must pay the IHT due to HMRC within 35 days. The 35-day period might not be realistic where illiquid assets such as commercial property is held in a pension.

If a pension death benefit is subject to income tax in the hands of the beneficiary, then any IHT paid in relation to the NPP can be deducted to arrive at the taxable income.

Following a death, the executors and PSA will need to collaborate closely and timeously to ensure the pension is valued, IHT quantified and paid to HMRC in a timely manner.

Practical issues

Going forward, clients will need to ensure pensions are firmly on the agenda in any succession and tax discussions, and existing IHT planning may need revisited.

For example, particular consideration should be given to whether inclusion of one’s pension in their estate will have an adverse impact on the availability of the residence nil rate band, which starts to taper away for estates valued over £2m.

Another potential issue is that NPP is treated as part of the general component of the estate, and so it may impact clients who have prepared wills with charitable bequests designed to trigger the reduced rate of IHT (36%). These wills should be reviewed now in case there are unexpected and undesirable consequences from April next year.

Where clients have commercial property in a SSAS say, they should revisit whether this still makes sense or if it should be removed from the SSAS. If commercial property should remain in the pension, thought should be given to how the pension will be valued for the purposes of IHT planning and how valuations will be dealt with following death. Further thought will need to be had in terms of payment of the IHT, especially when the underlying assets are illiquid.

It appears that unmarried couples in particular should review their pension arrangements. Although dependant’s schemes excluded from IHT as noted above, what constitutes a “dependant” is defined by each scheme and therefore not necessarily consistent across the board.

In general, clients need to ensure they have up to date records regarding their various pension pots as this has the potential to be a difficult and potentially risky area for executors.

While the technical note provides some welcome detail, there are clearly potential pitfalls for clients to be alive to, and we would strongly recommend that appropriate financial, succession and tax planning advice is reviewed ahead of the changes next April.

How we can help

If you have any questions in relation to the issues raised in this article, please contact Nick Dobbs or your usual Anderson Strathern contact.