Pension Inheritance Tax FAQs
What is changing for pensions and Inheritance Tax in April 2027?
For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be included in the value of the estate for Inheritance Tax. Until then, pensions normally sit outside the estate and pass IHT-free, which is why they have been a popular estate planning tool. The change was made law by the Finance Act 2026, and HMRC expects around 10,500 extra estates a year to pay IHT as a result, with a further 38,500 paying more than they otherwise would.
Will my spouse pay Inheritance Tax on my pension?
No. Anything left to a spouse or civil partner remains fully exempt from Inheritance Tax, including pension funds. The new rules mainly bite when pensions are left to children or other beneficiaries · typically on the second death of a couple, when the combined estate and any remaining pensions pass to the next generation. This calculator's "double allowances" option models that second-death scenario.
What is the double tax on pensions after age 75?
If you die at 75 or over, your beneficiaries already pay income tax at their own marginal rate when they withdraw money from the inherited pension. From April 2027, IHT at 40% can apply first, and income tax is then charged on what remains. For a higher-rate beneficiary that produces an effective combined rate of up to 64%, and up to 67% for an additional-rate beneficiary · among the highest effective tax rates anywhere in the UK system.
Are any pension benefits excluded from the change?
Yes. Death in service benefits paid from a registered pension scheme are excluded, and so are dependants' scheme pensions from defined benefit or collective money purchase arrangements. The change mainly targets unused defined contribution pots, drawdown funds and lump sum death benefits. Charity lump sum death benefits also remain IHT-free.
How can I reduce Inheritance Tax on my pension before 2027?
Strategies advisers commonly discuss include: drawing the pension and gifting from surplus income (immediately IHT-free if it is a regular pattern that leaves your lifestyle unaffected), making larger gifts that leave the estate after 7 years, leaving everything to your spouse first to use both sets of allowances, giving 10% of the estate to charity to cut the IHT rate to 36%, and simply spending the pension while using other assets for inheritance. The right answer depends heavily on your situation · take regulated financial advice before acting.
Who actually pays the IHT on a pension?
Personal representatives (executors) are responsible for reporting and paying IHT on unused pensions. Following consultation, they will be able to direct the pension scheme administrator to pay the IHT to HMRC directly out of the pension fund before anything is released to beneficiaries, which avoids beneficiaries having to fund the bill personally.
For informational purposes only · Not tax or financial advice · Based on the Finance Act 2026 rules for deaths on or after 6 April 2027 · NRB £325,000, RNRB £175,000 (tapered above £2m estates), IHT 40% · Death in service and DB dependants' pensions excluded · Take regulated advice before making estate planning decisions