The government has announced it will press ahead with plans to include unspent pensions in Inheritance Tax (IHT) calculations from April 2027. While it has made some adjustments after an industry consultation, the policy marks a significant shift in how pensions are treated on death.
We have been awaiting clarification since Chancellor Rachel Reeves first proposed the reform in her Autumn Statement in October 2024. At the time, the Chancellor described the changes as part of a broader effort to create “a fairer, less economically distortive tax treatment of inherited wealth and assets”. The announcement included proposals to bring unused pension funds and death benefits into scope for IHT.
Until now, pension savings have typically sat outside an individual’s estate for IHT purposes, giving many people the opportunity to leave behind more wealth for their loved ones by keeping their pension unspent.
What’s changing?
Following the consultation period, the government has confirmed some elements of the original plan will not go ahead. Notably, death in service benefits paid from a registered pension scheme will remain exempt from IHT.
Two other exclusions were also confirmed. First, scheme pensions paid to a dependant from a defined benefit arrangement will not be caught by the new rules. Second, death benefits from a collective money purchase scheme will also be excluded. The government also gave clarification that the ‘legal personal representatives’ of the deceased person will be responsible for declaring any pension benefits within the estate’s IHT return submitted to HMRC.
Impact on IHT receipts and affected estates
The policy change is expected to significantly boost IHT receipts. HMRC reported that between April and June 2025, IHT receipts totalled £2.2bn, £100m more than the same period in 2024. By 2029/30, the reform is projected to raise an additional £1.5bn a year.
Government estimates suggest around 8% of estates will be affected annually. Estimates also suggest the average IHT bill could rise by around £34,000 once the new rules take effect. However, those numbers could be higher, particularly if individuals who had assumed pensions would fall outside their estate fail to review their existing arrangements.
Reminder – how IHT works today
IHT is charged at 40% on the value of an estate above the available allowances. Currently, each individual has a standard nil-rate band of £325,000, with an additional £175,000 available under the residence nil-rate band if the family home is left to direct descendants.
You could consider these ways of reducing your estate’s IHT liability:
- Gifting – you can give away up to £3,000 a year tax-free, plus small gifts to different individuals. Larger gifts can also fall outside your estate if you survive for seven years after making them
- Trusts – placing assets into a trust can help reduce the size of your taxable estate, though rules are complex and advice is essential
- Charitable donations – leaving 10% of your estate to charity can reduce the overall IHT rate to 36%
- Life insurance – policies written in trust can help cover IHT liabilities without forming part of your estate.
Paying IHT
Although pensions are being brought into scope for IHT, the current rules around paying IHT aren’t changing. The person in charge of handling the deceased’s estate must calculate, report and pay any IHT due within six months of the end of the month in which the person died. From April 2025, interest on late payments has risen from 2.5% above the Bank of England Bank Rate (currently 4.25%) to 4% above Bank Rate, taking the late payment penalty to 8.25%.
The six-month deadline could prove challenging. From 2027, every estate that includes a pension will need to go through the process of checking whether IHT is due – not just wealthier estates – which could create bottlenecks. Pension providers and personal representatives will depend on each other to share information quickly, but delays are likely.
There’s also a risk some beneficiaries will face a high overall IHT bill. If someone dies at age 75 or over, their pension is already taxed as income when passed on. From 2027, it could also be hit by IHT. This ‘double layer’ of tax could mean more than half the pension is lost to tax, even for basic rate taxpayers. For higher earners or larger estates, the combined tax could be significantly more.
Looking ahead
This change underlines the importance of estate planning and regular financial reviews. For many people, pensions have long been a key part of IHT planning. With the rules now evolving, the potential impact on family wealth could be significant. The new rules won’t apply until April 2027, so there is time to prepare. It’s worth taking time to understand what’s in your estate, including the value of your pensions and property, and whether your estate could be exposed to a future IHT bill. Planning ahead can help ensure your wealth is passed on in the way you intend.
Talk to us
If you’re unsure how this change might affect your estate or your family, we can help you think through the implications and put a plan in place. It’s a good time to consider your options.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. The Financial Conduct Authority (FCA) does not regulate Will writing, tax and trust advice and certain forms of estate planning.