# Inherited Pensions and UK Inheritance Tax From 2027

Starting 6 April 2027, unused pension pots will lose their tax-exempt status in the UK, becoming subject to 40% inheritance tax and potential income tax.

**Published:** 2026-07-13  
**Updated:** 2026-07-13  
**Source:** https://aztajournal.com/gb/inherited-pensions-inheritance-tax-2027

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> The taxation of inherited pensions is undergoing a major overhaul. Beginning in April 2027, unused pension funds and death benefits will lose their tax-exempt status, bringing them into the scope of UK inheritance tax and significantly reshaping retirement planning strategies.

From **6 April 2027**, under the provisions of the **Finance Act 2026** (which received Royal Assent on 18 March 2026), most unused pension pots will be classed as "notional pension property" and brought into the deceased's estate for Inheritance Tax (IHT) calculations. This landmark shift fundamentally reverses decades of estate planning, under which pensions served as the premier tax-free wealth transfer mechanism.

## Key Takeaways: Pension IHT Reforms at a Glance

- **Abolition of standard exemption:** Unused pension funds will be aggregated with the rest of your estate for IHT purposes starting 6 April 2027.
- **Flat IHT rate of 40%:** The combined estate, including pension wealth, will face a 40% tax charge on everything value-assessed above your available nil-rate bands.
- **Frozen allowances:** The main Nil-Rate Band remains frozen at £325,000 until 2030/31, meaning more estates will drag above the threshold as pensions are bundled in.
- **Double taxation risk:** Beneficiaries of individuals who die aged 75 or over face up to a 67% combined tax penalty, as IHT is levied first, followed by marginal income tax on withdrawals.
- **Administrative pressure:** Personal Representatives (PRs) will face strict, new reporting obligations and potential personal liabilities, requiring rapid coordination with pension administrators.

## Are pensions exempt from inheritance tax?

Under current rules, most pension funds enjoy an exemption from inheritance tax on death. This is because standard defined contribution pensions are held under discretionary trusts, meaning the plan trustees legally choose who receives the benefits, rather than the deceased holding a direct beneficial interest.

However, this historic tax-free buffer is set to expire entirely. Under the **Finance Act 2026**, the discretionary trust exclusion will be bypassed for IHT calculations, forcing these unused pots into the main estate valuation.

## What are the pension inheritance tax changes from April 2027?

From **6 April 2027**, unused pension funds and death benefits will be treated as "notional pension property" and fully aggregated with your wider estate.

This means that upon death, the local estate executors must declare your remaining pension wealth alongside regular assets like property, cash, and investments. The total combined amount exceeding your personal Nil-Rate Band will be subject to the standard 40% IHT rate, changing the financial outcome for millions of families across the UK.

## How the frozen IHT thresholds and RNRB taper affect you

Your available IHT allowances are frozen through to the 2030/31 tax year. When your previously untaxed pension pots are added to your physical assets, the total value can easily push your estate beyond these frozen limits, triggering an unexpected tax bill.

Crucially, this aggregation can also push your estate over the £2 million taper threshold for the Residence Nil-Rate Band (RNRB). For every £2 your estate exceeds £2 million, you lose £1 of the RNRB allowance, which can entirely eliminate the valuable tax relief of up to £175,000.

| Allowance Type | Standard Value | Impact of Pension Aggregation |
| --- | --- | --- |
| Nil-Rate Band (NRB) | £325,000 | Pensions will eat into this first, leaving less nil-rate protection for properties and physical liquid cash. |
| Residence Nil-Rate Band (RNRB) | Up to £175,000 | Applies when passing a primary home to direct descendants; subject to tapering if total estate exceeds £2 million. |
| Transferable NRB (Married/Civil Partners) | Up to £650,000 | Allows a surviving partner to inherit unused allowance, but combined pension pots can easily exceed this joint threshold. |
| RNRB Taper Threshold | Begins at £2,000,000 | Every £2 over this threshold reduces RNRB by £1, completely wiping out home-related relief at £2,350,000. |

## Which pension assets are impacted by the 2027 IHT rules?

Not all pension arrangements face the same tax vulnerability under the upcoming rules. Knowing which of your assets fall inside the scope of the 40% IHT charge is vital for planning.

While standard personal drawdown pots and SIPPs are primary targets, traditional death-in-service benefits and certain survivor schemes that lack a transferable capital value remain protected from the new charges.

| Pension Asset Type | Tax Treatment from 6 April 2027 | Exemption Basis |
| --- | --- | --- |
| Unused DC Pension (SIPP, Personal Pension) | In Scope — 40% IHT | Fully aggregated into the estate as notional pension property. |
| DB Scheme Dependants' Pensions | Generally Not in Scope | These schemes provide an ongoing income to a survivor but have no transferable capital value to tax. |
| Death-in-Service Lump Sums | Excluded | Retains its existing status and remains protected from IHT. |
| Pension passed to Spouse / Civil Partner | Fully Exempt | Spousal exemption is preserved under Section 18 of the Inheritance Tax Act 1984. |
| Pension bequested to UK Registered Charity | Fully Exempt | Charitable exempt status is extended to include directly nominated pension funds. |

## How much tax do you pay on an inherited pension?

The amount of tax paid on an inherited pension depends closely on the age of the deceased at the time of death. If death occurs under the age of 75, the funds can still be taken income tax-free, though they are now subject to the standard 40% IHT charge.

For those passing away aged 75 or over, families face a significant "double taxation" risk. The unused pension is first subjected to 40% IHT, and the remaining balance is then taxed at the beneficiary's marginal UK income rate (up to 45%) as they make withdrawals. In the worst-case scenarios, the effective combined tax rate can climb to approximately 67%, leaving your heirs with just 33p of every pound in the pot.

## Why pension changes from 2027 could increase IHT for families

According to official projections released by HM Revenue and Customs (HMRC), these modifications will rapidly expand the number of families pulled into the UK wealth tax net.

1. **Newly liable estates:** Approximately 10,500 estates will face an inheritance tax liability for the first time strictly as a result of including pensions.
2. **Increased tax bills:** Another 38,500 estates that already pay IHT will experience higher tax bills, with an average estimated increase of £34,000 per estate.
3. **Massive Treasury yields:** The Treasury expects to raise an additional £710 million in the 2027/28 tax year, with annual yields climbing to £1.67 billion by 2030/31.
4. **Broad aggregate impact:** In total, about 213,000 estates with some form of inheritable pension wealth will be monitored annually under these rules.

## The administrative burden on executors and PRs

Personal Representatives (PRs) and executors face a heavy administrative burden under the new system. They will hold primary legal responsibility for reporting the value of all pension assets to HMRC and initiating the payment process.

A newly introduced "pension direct payment scheme" will allow PRs to formally instruct pension scheme administrators to pay the required IHT directly to HMRC. However, this must be completed within tight timelines. Because normal statutory IHT is due within 6 months of the end of the month of death, executors may face personal financial liability if complex calculations delay payment.

## Practical planning steps to consider before April 2027

With the rules shifting on 6 April 2027, you have a crucial window to restructure your retirement assets and safeguard your family's future legacy.

1. **Review your nomination forms:** Update and reassess your Expression of Wishes forms, as leaving a pension directly to a non-exempt heir like a child will now trigger a 40% tax charge.
2. **Optimise drawdown sequencing:** Consider drawing down taxable pension funds first during your lifetime, preserving non-pension assets (such as ISAs) that do not carry double-tax income liabilities on death.
3. **Utilise gifting rules:** Take advantage of the "normal expenditure out of income" rule to make immediate, tax-exempt lifetime gifts from your pension withdrawals.
4. **Establish trust-held life insurance:** Set up a whole-of-life insurance policy written under an absolute trust to specifically cover the predicted IHT liability on your pension pot.
5. **Consider charitable bequests:** Name a registered UK charity as a partial beneficiary, keeping in mind that dedicating 10% or more of your net estate to charity drops your overall IHT rate to 36%.

### Is an inherited pension taxable as income under the new rules?

Yes, if the deceased was aged 75 or over at the time of death. The beneficiary must pay income tax at their normal marginal rate on any withdrawals, in addition to the inheritance tax paid by the estate.

### Is inherited pension money taxable if the deceased died under the age of 75?

If death occurs under age 75, the pension funds are still subject to inheritance tax (IHT) inside the estate, but the beneficiaries can normally withdraw the remaining funds free of income tax, provided they are distributed within two years.

### How does the spousal exemption work for pensions after April 2027?

The spousal exemption is preserved under Section 18 of the Inheritance Tax Act 1984. Unused pension wealth passed directly to a surviving spouse or civil partner remains entirely free from inheritance tax.

### What happens if I leave some or all of my pension pot to a registered UK charity?

The charitable exemption is being extended to pension assets. Any pension funds left directly to a registered UK charity will be fully exempt from inheritance tax, meaning the charity receives 100% of the value.

### How does being unmarried or in a cohabiting couple affect my pension's IHT liability?

Cohabiting and unmarried partners do not qualify for the UK's spousal tax exemption. Consequently, passing a pension pot to an unmarried partner after April 2027 will immediately trigger the 40% IHT rate on those funds.