Pension Inheritance Tax From April 2027: Unused Pension Funds to Fall Inside Estates
Pension searches topped Google Trends in the United Kingdom on Sunday 8 November 2026, driven by questions about inheritance tax after the Autumn Budget 2026. The change at the centre of the searches takes effect on 6 April 2027, when most unused pension funds and pension death benefits will count as part of a person’s estate for inheritance tax purposes for the first time.
Until that date, most unused pension pots sit outside the estate for inheritance tax. From 6 April 2027, the position reverses: the gross value of most unused pension funds immediately before death will be treated as part of the member’s estate, whether or not the scheme has discretion over how death benefits are paid. The reform was first announced in the Autumn Budget on 30 October 2024, confirmed through a technical consultation, and legislated in the Finance Act 2026, which received Royal Assent on 18 March 2026.
Pension inheritance tax at a glance
| Detail | What is confirmed |
|---|---|
| Change takes effect | 6 April 2027, for deaths on or after that date |
| What changes | Most unused pension funds and lump sum death benefits count towards the estate for inheritance tax |
| Current position until then | Most unused pension pots sit outside the estate for inheritance tax |
| Standard inheritance tax rate | 40% on the part of the estate above the available thresholds |
| Nil-rate band | £325,000 frozen until 2031 |
| Residence nil-rate band | £175,000 where a qualifying home passes to direct descendants |
| Who reports and pays | The deceased’s personal representatives (executors or administrators), not the pension provider |
| Legislation | Finance Act 2026 (Royal Assent 18 March 2026); HMRC policy paper and technical notes published 2025-2026 |
| Deaths before 6 April 2027 | Unaffected; current rules still apply even if benefits are paid out afterwards |
How the April 2027 inheritance tax change works for pension savers
The new rules mainly affect defined contribution pensions, including personal pensions, SIPPs and most workplace pensions, where money remains unused when the saver dies. HMRC’s technical note on inheritance tax on pensions, first published on 11 May 2026 and updated on 29 May 2026, with a second technical note on 27 August 2026, sets out the detail. The value counted is the gross value of the unused pension fund immediately before death, described in the legislation as notional pension property.
The Government has been explicit about its rationale: pensions were designed to fund retirement, not to serve as a tax-free vehicle for passing on wealth after death. Bringing inherited pensions into the inheritance tax regime aligns their treatment with other inherited assets and removes the incentive to leave pension money untouched as an estate-planning tool.
HMRC estimates that of around 213,000 estates with inheritable pension wealth in 2027-28, about 10,500 will face an inheritance tax bill where previously they would have paid none, and around 38,500 will pay more inheritance tax than they would have done. The average inheritance tax liability is expected to increase by approximately £34,000 for affected estates when pension assets are included.
What stays outside the inheritance tax charge
Death-in-service benefits paid from a registered pension scheme remain outside inheritance tax, whether they are paid under a discretionary trust or on a non-discretionary basis, as in some public service pension schemes. Dependants’ scheme pensions from a defined benefit or collective money purchase arrangement, paid to a spouse, civil partner or registered charity, also remain outside the charge.
The spouse and civil partner exemption applies in full to pension funds left to a spouse or civil partner. A lump sum death benefit paid to a qualifying charity is tax-free, and a charitable pension gift counts towards the 10% of the net estate needed to qualify for the reduced 36% inheritance tax rate, instead of the standard 40%, on the rest of the estate. The Government has said most estates will continue to have no inheritance tax liability.
The double tax risk for savers who die aged 75 or over
Beneficiaries may face tax twice where the saver died aged 75 or over. Inheritance tax of up to 40% may apply to the pension, and income tax at the beneficiary’s marginal rate, potentially up to 45%, may also apply when the inherited pension is drawn down. Analysis of the combination puts the combined effective tax rate in such cases at 64% to 67%, or higher for larger estates.
That double charge is one reason advisers have urged savers to review nominations, wills, retirement income plans and life cover before April 2027. The inheritance tax payment deadline of six months from the end of the month of death remains unchanged, and interest on unpaid inheritance tax is currently running at 7.75%.
Two other pension tax changes that arrived with the Autumn Budget 2026
Chancellor John Healey’s Autumn Budget on 28 October 2026 also removed a separate trap in the pension death benefit rules. The two-year rule, under which otherwise tax-free pension death benefits could become taxable if they were paid more than two years after the scheme administrator learned of the death, has been removed for payments made on or after 28 October 2026, including where the pension holder died before that date, with legislation to follow through the Finance Bill 2026-27. Our UK Budget 2026 summary sets out the wider package, including the new pension tax allowance.
The Budget also confirmed a new Pension Tax Allowance. From 6 April 2027 until 5 April 2030, people at or above State Pension age whose total income is no more than the full new State Pension will not pay income tax. The full new State Pension rises by 3.9% from April 2027 to £13,036.40 a year, according to the Government Actuary’s Department, taking it above the £12,570 personal allowance, which stays frozen for 2027-28. The allowance is expected to be worth up to £94 in 2027-28. The triple lock continues through April 2029, and from April 2030 increases will be based on the highest of 2.5%, inflation, or the amount required to maintain the State Pension’s value relative to earnings at the level reached in April 2029.
Why searches surged: the house-sale question behind the trend
The immediate trigger for the searches was a money advice question, not a new Government announcement. Readers asked whether selling a house to a daughter at a reduced price avoids inheritance tax, a question answered in the Sky News money blog and in guidance from solicitors and conveyancers. The short answer is that it does not work as a shortcut: for tax purposes, a sale to a family member below market value is treated as a gift of the difference, and gifts only fall outside the estate if the giver survives for seven years and has not retained a benefit, such as continuing to live in the home rent-free.
The same seven-year rule explains why the April 2027 pension change matters to families who had relied on pensions as a way to pass on wealth without inheritance tax. With the nil-rate band frozen at £325,000 since 2009 and the residence nil-rate band at £175,000, more estates will cross the threshold. Anyone considering gifts, nominations or drawdown plans should take regulated advice, because the rules interact with income tax, capital gains tax and care-fee assessments in different ways. Separately, the Government’s Guided Retirement consultation, announced on 3 November 2026 by Pensions Minister Torsten Bell, could change how workplace pension savers turn a pot into income for life, and runs until 22 December 2026.
Pension inheritance tax: questions answered
Q: When do unused pension funds become liable for IHT?
A: For deaths on or after 6 April 2027. Deaths before that date are unaffected, even if the benefits are paid out afterwards.
Q: Does the change apply to all pensions?
A: No. The change mainly affects defined contribution pensions where money remains unused at death. Death-in-service benefits, dependants’ scheme pensions to a spouse, civil partner or charity, and anything left to a spouse, civil partner or charity remain outside the charge.
Q: How much IHT will be charged on a pension?
A: Inheritance tax is charged at 40% on the part of the estate above the available thresholds. The standard nil-rate band is £325,000, plus the residence nil-rate band of £175,000 where a qualifying home passes to direct descendants. Income tax can also apply when beneficiaries draw down an inherited pension where the saver died aged 75 or over.
Q: Who has to report and pay the tax on pension wealth?
A: The deceased’s personal representatives, such as executors or administrators, are responsible for reporting and paying any inheritance tax on pension wealth. Pension scheme administrators will have a mechanism to pay the tax directly to HMRC.
Q: Can I sell my house to my daughter at a reduced price to avoid IHT?
A: Not as a shortcut. The sale is treated as a gift of the difference between the sale price and the market value. The gift only falls outside the estate if the giver survives for seven years and has not retained a benefit, such as continuing to live in the home rent-free.
Q: Does the two-year rule for pension death benefits still apply?
A: No. The rule that could make otherwise tax-free pension death benefits taxable if they were paid more than two years after the scheme administrator learned of the death has been removed for payments made on or after 28 October 2026.
Myth-busting: pension inheritance tax
- Myth: Pensions will always pass tax-free to your family. Reality: that was broadly true until now, but from 6 April 2027 most unused pension funds count towards the estate for inheritance tax, and income tax can apply on top where the saver died aged 75 or over.
- Myth: Selling your house to your children for £1 removes it from inheritance tax. Reality: the discount is treated as a gift at market value, the seven-year rule applies, and continuing to live in the home rent-free can keep it in your estate under the gift-with-reservation rules.
- Myth: The April 2027 change is only a proposal and may not happen. Reality: the change is law. It was announced in the Autumn Budget 2024, consulted on, and legislated in the Finance Act 2026, which received Royal Assent on 18 March 2026.
- Myth: Every estate with a pension will now pay inheritance tax. Reality: no. Most estates will still pay no inheritance tax. An estate becomes liable only where the total value, including unused pension funds, exceeds the available nil-rate band and any residence nil-rate band. Spouses, civil partners and charities remain exempt.
