Pensions and inheritance tax from April 2027: what changes

What changes on 6 April 2027

Until now, most unused pension funds have sat outside the estate for inheritance tax. Sections 66 to 71 of the Finance Act 2026, which received Royal Assent on 18 March 2026, change that. New section 150A of the Inheritance Tax Act 1984 treats a member of a registered pension scheme, a qualifying non-UK pension scheme or a section 615(3) scheme as "beneficially entitled immediately before their death" to what the Act calls their notional pension property.

The practical effect is that the unused fund is added to everything else the person owned when the inheritance tax on the estate is worked out.

The trigger is the date of death. When the money is actually paid makes no difference. Section 71 of the Act applies the change to deaths occurring on or after 6 April 2027, and HMRC has confirmed that if the member dies before that date the current rules apply even where the benefits reach the family afterwards. Someone who dies on 5 April 2027 is treated one way; someone who dies the following day is treated another.

What counts towards the estate

The starting point is wide. Unused funds left in a defined contribution pot, and death benefits payable from a registered scheme, are brought in unless they fall inside one of the four exclusions below. It does not matter whether the scheme pays the money at the trustees' discretion or under a binding direction.

One point causes more confusion than any other. The value is fixed by reference to the trustees' decision. The payment date does not set it. HMRC treats the notional pension property as vested in a beneficiary at the point the trustees decide who receives it, and says in terms that the timing of any later payment is not relevant. A decision taken in month four, with the money reaching the family in month fourteen, is still a month-four event for these purposes.

Two reliefs that people expect to be available are not. Inheritance tax on pension property cannot be paid by instalments: section 227 of the 1984 Act allows instalments only on qualifying property, and notional pension property does not meet that definition because the member is not treated as owning the underlying scheme assets. Loss on sale relief is unavailable for the same reason.

The four exclusions

Section 150A(6) contains an exhaustive list of excluded benefits. There are four, and each is narrower than it first appears.

Dependants' scheme pensions

A dependants' scheme pension meeting the statutory conditions is excluded, and HMRC confirms this holds whatever type of arrangement it is paid from.

Trivial commutation, but only in part

This one is regularly reported wrongly. The exclusion covers a trivial commutation lump sum death benefit only so far as its payment extinguishes an entitlement to a dependants' scheme pension. HMRC's own worked example takes a £20,000 trivial commutation of which £16,000 represents the scheme pension: the £16,000 is excluded and the balance is not.

Joint life annuities

A dependants' annuity or a nominees' annuity is excluded where it was purchased together with a lifetime annuity payable to the member. HMRC has confirmed there is no requirement for the other party to be a dependant of the member.

Death in service benefits

The Act never uses the phrase. It describes a benefit payable because the member was in employment or work of a particular description immediately before death, and not payable if they were not. Two limits matter in practice. HMRC says payments from schemes relating to previous jobs, where the deceased was only a deferred member, do not meet the conditions. And money that would have been paid anyway is not covered: in HMRC's example of a death paying three times salary plus a refund of contributions, the refund is not an excluded benefit because that scheme would have paid it in other circumstances.

What this does not change

Two things are worth saying because people assume otherwise. The pension is not taxed twice over as a matter of course: the inheritance tax charge sits alongside the existing income tax position on death benefits, and where the inheritance tax is paid directly out of the scheme the income tax applies to what is left after it. And the change does not alter who the trustees can pay. The scheme's own rules and the member's expression of wish still govern that; what changes is the tax that follows the decision.

It also does not reach pensions already in payment in the ordinary way. What is caught is the unused fund and death benefits. An income a scheme was already paying, which stops on death, is a different thing.

Spouses, civil partners and charities

The existing exemptions still apply, and the Act was amended to attach them to pension property. Section 69 of the Finance Act 2026 amends sections 18, 23, 24, 24A, 25 and 27 of the 1984 Act so that the spouse and civil partner exemption, and the charity exemption, reach property received under the scheme on the member's death. Where the whole of an unused fund goes to a surviving spouse who is a long-term UK resident, there is no inheritance tax on it.

There is an administrative trap in that. HMRC states that the exemptions are not taken into account when the value of the notional pension property is calculated. The personal representative still has to establish and report the full value, then claim the exemption at estate level. An exempt pension is not an invisible one.

The spouse exemption remains subject to the long-term UK residence rules, so it is not automatic in every case.

How many estates this affects

HMRC's published estimate is that of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 will have an inheritance tax liability where previously they would not, and approximately 38,500 will pay more than would previously have been the case. The average liability is expected to increase by around £34,000 where pension assets are included.

HMRC attaches a caveat to those figures that is worth repeating: the estimates are static, take no account of behaviour such as planning or drawing funds down faster, and should be viewed as a maximum. They are not a forecast.

For context, the nil-rate band is £325,000 and the residence nil-rate band is up to £175,000 where a home passes to direct descendants. Both are frozen to 5 April 2031 by section 86 of the Finance Act 2021, as amended by section 72 of the Finance Act 2026, along with the £2 million taper threshold.

What to review before April 2027

Three documents are worth looking at together, because a change to one without the others rarely achieves what people expect.

• Your expression of wish form. Most were completed on the basis that the pension sat outside the estate. Where the fund is now going to be counted, who it is directed to changes the tax as well as the outcome.
• Your will. A will drafted before 2024 was almost certainly written on the old assumption. Where it uses a nil-rate band legacy, adding the pension to the estate can change what that clause actually gives away.
• Any life policy. A policy written in trust pays outside the estate. One that is not written in trust does not, and the interaction with a pension that is now counted is worth checking in the same conversation.

Blended families and second marriages

The households where this bites hardest are the ones where the pension was doing work the will was not. A member who directed the fund to children from a first marriage, on the basis that it fell outside the estate and outside the will, now has that value counted in the estate — and the tax falls on the estate before the residue reaches whoever the will names. The people who bear the tax and the people who receive the pension can be different people entirely. That is worth modelling before anyone assumes it works the way it used to.

What we would not do is treat this as a reason to strip a pension out in a hurry. Drawing funds down faster has its own income tax consequences, and HMRC has explicitly anticipated that behaviour in its own estimates. The sensible order is to work out whether the estate is likely to be taxable at all once the pension is included, and only then to decide whether anything needs to change.

Some of the detail is still to come. HMRC has published two technical notes, in May and August 2026, and has said a third will cover international issues, the interaction with income tax, intestacy and trusts. Two further statutory instruments are expected before April 2027, including one intended to allow estates holding pension property to qualify as excepted estates. Until those are made, whether a straightforward estate with a pension will need a full account is not settled.

Frequently asked questions

Does this apply if someone dies before 6 April 2027?

No. Section 71 of the Finance Act 2026 applies the change to deaths on or after 6 April 2027. HMRC has confirmed that where the member dies before that date, the current rules apply even if the pension benefits are paid to the family afterwards. The date of death is what matters. When the money leaves the scheme does not affect which rules apply.

Is death in service pay caught?

Generally no, but the exclusion is narrower than the phrase suggests. The Act covers a benefit payable because the member was in employment of a particular description immediately before death and not payable otherwise. HMRC says it does not reach payments from a scheme the deceased was only a deferred member of, and does not reach amounts the scheme would have paid anyway, such as a refund of contributions paid alongside a multiple of salary.

My pension is going to my husband. Is there tax?

Where the whole fund passes to a spouse or civil partner who is a long-term UK resident, the spouse exemption applies and there is no inheritance tax on it. The Finance Act 2026 amended the exemption so it reaches property received under the scheme. The value still has to be established and reported by the personal representatives before the exemption is claimed, so an exempt pension is not one they can ignore.

Can the tax be paid in instalments?

No. Instalments are available only on qualifying property as defined in section 227 of the Inheritance Tax Act 1984, and notional pension property does not fall within that definition because the member is not treated as owning the scheme's underlying assets. Loss on sale relief is unavailable for the same reason. The tax is due in full at the end of the sixth month after death.

Should I take money out of my pension before April 2027?

Not as a reflex. Drawing funds down faster has income tax consequences of its own, and whether it helps depends on the size of the estate, who the beneficiaries are and what other assets there are. HMRC has explicitly assumed some people will do this and described its own impact figures as a maximum for that reason. Work out whether the estate would be taxable with the pension included before changing anything.

Do I need to change my expression of wish form?

It is worth reading, whatever you decide. Most were completed when the pension sat outside the estate, so the direction was chosen without any inheritance tax consequence attached to it. From April 2027 who the fund is directed to affects the tax as well as the outcome, and the form should be read alongside your will, not on its own.

Is everything about the new rules settled?

Not yet. HMRC published technical notes in May and August 2026 and has said a third will cover international issues, the detailed interaction with income tax, intestacy and trusts. Two further statutory instruments are expected before April 2027, one of which is intended to let estates holding pension property qualify as excepted estates. Until that is made, the reporting position for simpler estates is not final.

Sources & further reading

• legislation.gov.uk — Finance Act 2026, section 66
• legislation.gov.uk — Finance Act 2026, section 71 (commencement)
• legislation.gov.uk — Finance Act 2026, section 69 (exemptions)
• GOV.UK — Technical note: Inheritance Tax on pensions
• GOV.UK — Further information on Inheritance Tax and pensions
• GOV.UK — Inheritance Tax on unused pension funds and death benefits
• legislation.gov.uk — Finance Act 2021, section 86 (frozen thresholds)

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 21 September 2026. AD Solicitors Limited is a recognised body regulated by the SRA (no. 8011228).