New HMRC guidance exposes the complexity of pension inheritance tax changes
In less than a year, the way your pension is treated for inheritance tax (IHT) will change significantly. Most unused defined contribution pensions and many death benefits will be included in the value of your estate when you pass away.
HMRC recently provided more detail on how these rules will work in practice. While this added clarity is helpful, it also highlights a key point: these changes will not only affect how much tax is paid, but will make the process more complex for families dealing with an estate.
What’s actually changing
For many years, pensions have generally sat outside the scope of IHT and have been widely used as a tax-efficient way to pass wealth on to the next generation. Autumn Budget 2024 announced that from 6 April 2027, most unused pension funds and death benefits will be included in your estate.
While this applies across a wide range of pension types, some important exemptions remain, including:
- Transfers to a spouse or civil partner
- Death-in-service benefits
- Dependants’ pensions
Why this matters
This change could have a significant impact on how much of your pension your beneficiaries ultimately receive.
From April 2027, pension funds could be subject to:
- 40% inheritance tax; and
- Income tax when beneficiaries access the funds
For anyone who has been relying on pensions as part of their estate planning, this is an important moment to review those plans.
New detail from HMRC: a more complex process
One of the biggest developments this month, via a technical note from HMRC, is the level of detail around how estates will be administered.
Executors (personal representatives) will be responsible for:
- Identifying all pension arrangements
- Contacting each provider
- Obtaining valuations and beneficiary details
- Reporting and paying any IHT due
HMRC have confirmed that a new system will be used to calculate the tax, and that pension schemes will need to share detailed information with executors.
We foresee this being challenging in practice, particularly where someone has built up multiple pensions over their lifetime. Recent commentary has already described executors as needing to act like “pension detectives”, tracking down historic or forgotten pension pots.
Valuation and timing challenges
Valuing pensions is not always straightforward.
For simple, cash-based pensions this may be relatively easy. However, SIPPs and other pensions may include assets such as commercial property or private investments, which can take time to value.
If valuations are delayed:
- Executors may need to rely on estimates
- Returns may need to be amended later
- Interest could apply if tax is paid late
This is particularly important because IHT is generally due within six months of death. Interest starts to apply immediately after that point, even if delays are outside the family’s control.
New rules on withholding and payment
Recent updates also confirm how tax will be managed in practice.
Executors will be able to:
- Ask pension schemes to withhold up to 50% of benefits to cover potential IHT
- Arrange for IHT to be paid directly from pension funds to HMRC
These measures are designed to reduce the risk of families needing to sell other assets to pay a tax bill. However, they may also mean that part of a pension remains tied up for some time while the final position is confirmed.
Ongoing uncertainty
Although more detail has now been published, there are still important gaps.
HMRC have said that they will continue to publish secondary legislation, guidance and supporting materials ahead of April 2027. This creates uncertainty for both pension providers and families, and reinforces the need to plan ahead rather than wait.
What you should do next
Starting your preparations now will put you in a more confident position before the IHT changes take effect. We recommend:
- Reviewing your pension arrangements and beneficiary nominations
- Reconsidering how pensions fit into your overall estate planning
- Thinking about the potential tax impact on your family
- Ensuring your executors will be able to easily identify your pension assets
Keeping clear, up-to-date records of your pensions could make a significant difference to your family later on.
How BKL can help
Taking advice early can help you stay ahead of these changes and put the right plans in place. Our specialists in estate and IHT planning can guide you through the factors that may affect your IHT liability, and help you to structure your wealth as tax-efficiently as possible.
For a chat about how we can help you, get in touch with Ryan Bevan using the form below.
Contact Ryan
Frequently asked questions: Changes to inheritance tax and pensions from April 2027
What’s changing for pensions and inheritance tax from April 2027?
From 6 April 2027, most unused defined contribution pension funds and certain death benefits will be included in a person’s estate for Inheritance Tax (IHT) purposes. This represents a major shift, as pensions have historically sat outside the IHT regime.
As a result, pension wealth may now be exposed to IHT at up to 40%, potentially alongside income tax when beneficiaries access funds. This change significantly alters how pensions are used in estate planning and may reduce the amount ultimately passed to beneficiaries.
Which types of pensions will be affected by the new inheritance tax rules?
Most defined contribution pensions and associated death benefits will fall within the scope of the new rules, regardless of provider or structure. This includes personal pensions and SIPPs (Self-Invested Personal Pensions).
However, some important exemptions still apply, including transfers to a surviving spouse or civil partner, dependants’ pensions, and death-in-service benefits.
Understanding which elements of your pension arrangements fall inside or outside IHT will be key to effective estate planning under the new framework.
Will beneficiaries pay both inheritance tax and income tax on pensions?
Yes, in some cases pension benefits could effectively be subject to both inheritance tax and income tax. From April 2027, the pension value may first be included in the estate for IHT (potentially at 40%), and then beneficiaries could pay income tax when they draw funds.
This “double taxation” risk is one of the most significant implications of the changes and may materially reduce the net inheritance received, particularly for larger pension pots.
How will executors deal with pensions under the new rules?
Executors (personal representatives) will play a much more active role in identifying, valuing, and reporting pension assets. They will need to locate all pension arrangements, contact providers, gather valuations, and report these to HMRC when calculating IHT.
In practice, this can be complex, especially where multiple pension pots exist across different providers or include non-cash assets. Ensuring clear records and documentation is in place during your lifetime can significantly ease the administrative burden on executors.
What happens if pension valuations are delayed?
If pension valuations are delayed, executors may have to submit estimated figures to HMRC and amend them later once final values are confirmed. This can be particularly challenging for pensions holding assets such as commercial property or private investments, which can take time to assess.
Importantly, IHT is generally due within six months of death, and interest can apply after that deadline, even if delays are outside the family’s control. This makes early preparation and professional support critical.
Can inheritance tax on pensions be paid directly from the pension pot?
Yes, new provisions allow executors to request that pension schemes either withhold funds or pay IHT directly to HMRC. Up to 50% of pension benefits can be retained to cover potential tax liabilities.
This can help reduce the need to sell other estate assets to fund the tax bill. However, it may also mean that part of the pension remains inaccessible to beneficiaries until the final tax position is agreed.
What should individuals do now to prepare for the 2027 changes?
The most effective step is to review your estate and pension planning well before April 2027. This includes checking beneficiary nominations, assessing how pensions fit into your wider estate strategy, and ensuring records of all pension arrangements are clear and accessible. You may also want to model the potential tax impact on your estate and consider alternative planning approaches.
Taking advice early can help ensure your plans remain tax-efficient and workable under the new rules.
Does this mean pensions are no longer a tax-efficient inheritance tool?
Not entirely, but their role is changing. While pensions will lose some of their IHT advantages, they may still offer valuable planning opportunities depending on your circumstances and the available exemptions. For example, spouse transfers remain outside IHT, and timing of withdrawals can still influence income tax outcomes. The key shift is that pensions can no longer be assumed to sit outside the estate, meaning their use must now be considered more carefully alongside other assets.
What is a common misunderstanding about these changes?
A common misconception is that all pensions will automatically be taxed at death. In reality, the rules are more nuanced: certain benefits remain exempt, and the overall tax outcome depends on factors such as beneficiary type, pension structure, and how funds are accessed.
However, the key point is that pensions will no longer be broadly excluded from IHT, which many individuals have historically relied on when planning wealth transfers.
Why is it important to organise pension records now?
Keeping detailed, up-to-date records of all pension arrangements is increasingly important because executors will need to identify and value each pension pot after death. Missing or unclear information could delay estate administration, increase costs, or lead to interest charges on late IHT payments.
As individuals accumulate multiple pensions over their careers, maintaining a clear overview can make a significant difference to how efficiently an estate is managed and how quickly beneficiaries receive funds.
