Answers · UK 2025/26
What is the inheritance tax change on pensions from April 2027 in the UK?
From April 2027, most unused pension pots will be brought into the deceased's estate for inheritance tax purposes, ending the longstanding exemption that made pensions a popular IHT-planning tool.
Full answer
Current Position (Pre-April 2027) At present, defined contribution pension pots fall outside of a person's estate for inheritance tax purposes. This means that any funds remaining in a pension on death are not subject to the 40% IHT charge, making pensions highly attractive as a wealth-transfer vehicle. Beneficiaries may also receive the funds tax-free if the member dies before age 75, or as taxable income if the member dies aged 75 or over. The April 2027 Reform The Autumn Budget 2024 announced that from 6 April 2027, unused pension funds and death benefits payable from a pension will be included within the deceased's estate for IHT purposes. HMRC and the pension industry are working through the technical detail, with a consultation on the mechanics concluded in 2025. How IHT Will Apply The combined estate -- including the pension pot -- will be assessed against the available nil-rate band (GBP 325,000) and, where applicable, the residence nil-rate band (GBP 175,000). Anything above the threshold is taxed at 40% (or 36% if at least 10% of the net estate is left to charity). Pension schemes will be responsible for reporting and paying the IHT attributable to the pension, a significant administrative change for trustees and providers. Who Is Most Affected Higher-net-worth individuals who deliberately left pensions largely untouched in retirement to pass wealth to the next generation will see the biggest impact. Those whose total estate (including pension) exceeds GBP 500,000 -- or GBP 1,000,000 for a surviving spouse using both allowances -- should review their withdrawal strategy before April 2027. Planning Considerations Drawing down pension funds more quickly and gifting within annual exemptions (GBP 3,000 per year) or the seven-year potentially exempt transfer rule may become more attractive. However, income tax still applies to pension withdrawals above the 25% tax-free cash entitlement, so the optimal drawdown rate depends on individual marginal rates. Independent financial advice is strongly recommended before making significant changes.
Try the calculator
This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.