Pension death benefits and inheritance tax changes from April 2027

What are the current rules?

Pension death benefits are not generally included in the value of the individual’s estate for inheritance tax purposes because of the way their pension scheme is set up.

Pension schemes written under a trust or deed poll, and where the pension scheme administrator or the scheme trustees have discretion over who the death benefits are paid to, are not usually included in the value of the individual’s estate for inheritance tax purposes. 

However, non-discretionary death benefits – those where an individual has provided direction on who should receive the death benefits or pension schemes not written under trust or deed poll – are included in the value of the individual’s estate for inheritance tax purposes.

What are the pension inheritance tax changes from April 2027?

• From 6 April 2027 most unused pension funds and death benefits will be included within the value of an individual's estate for inheritance tax purposes. This is regardless of whether the pension scheme administrators or scheme trustees have discretion over the payment of any death benefits. Death in service benefits payable from both discretionary and non-discretionary registered pensions schemes and joint life annuities will not be included.
• For inheritance tax purposes, an individual is considered to have beneficial ownership of "notional pension property" immediately before their death, which may result in an inheritance tax charge. The value of this "notional pension property" is determined based on the individual's arrangements within the pension scheme as they existed just before death. 
• Personal representatives will be liable for reporting and paying any inheritance tax due on unused pension funds and death benefits. Pension scheme administrators will have new duties to support personal representatives in paying inheritance tax, including the new Pension Inheritance Tax Payments Scheme.
• The Finance Bill contains legislation that allows legal personal representatives to request a scheme withholds up to 50% of the taxable death benefits for up to 15 months after the end of the month in which the individual died. However, this rule does not apply if the death benefits are being paid to a spouse or civil partner who is a long-term UK resident.
• To mitigate the liquidity challenges, personal representatives and pension beneficiaries will have options on paying inheritance tax due on unused pension funds and death benefits.
• Pension scheme administrators will have to set up and run internal IT systems to offer the Pensions Inheritance Tax Payment Scheme. There will also be new obligations to communicate the potential tax consequences of decisions.
• The existing exemption from inheritance tax for pension death benefits passing to a surviving spouse or civil partner, and registered charities will be maintained.

The government is concerned that pensions are not being used for their intended purpose; to encourage saving for retirement and later life. Instead, they’re being used, and marketed, as an intergenerational wealth transfer tool allowing benefits to be passed to beneficiaries without an inheritance tax charge.

On 2 December 2025, the Finance (No.2) Bill had its first reading in Parliament. The bill's draft pension provisions establish the basis for including most unused pension funds in an individual's estate for inheritance tax purposes, with changes to the Inheritance Tax Act 1984. 

How will the withholding notice work?

If the personal representative knows they are, or thinks they might be, responsible for the pension inheritance tax charge, they can give a "withholding notice" to the scheme administrator of a registered pension plan.  
 
This approach was first announced in the Autumn Budget on 26 November 2025 and confirmed in HMRC’s Pension schemes newsletter 175. Essentially, if the personal representative reasonably believes inheritance tax will be due, they can instruct scheme administrators to hold back 50% of the taxable benefits (those subject to inheritance tax) for up to 15 months after the end of the month in which the individual died. Personal representatives can direct the scheme administrators to use the withheld benefits to pay HMRC any owed inheritance tax before releasing the remaining funds to beneficiaries. 

A valid "withholding notice" means that the scheme administrator must not pay any beneficiary (other than the deceased's spouse, civil partner, charity, or registered club) more than 50% of their entitlement under the scheme. The "withholding notice" cannot be given more than 15 months after the end of the month when the person died, nor if the inheritance tax charge has already been paid. 

What pension death benefits are in scope?

What pension death benefits aren’t in scope?

What will the new process be for reporting and paying inheritance tax on unused pension benefits?

HMRC has created the following high-level process for reporting and paying inheritance tax on unused pension funds and death benefits. They recognise that some of the stages will overlap, and it does not capture all customer journeys. HMRC will work with industry experts to develop and refine these processes and will publish further tools and guidance to support all those involved ahead of implementation in April 2027.

1. Stage 1: Information exchange to establish the value of any pension benefits to be included in the estate
   • Personal representatives must identify what pension benefits the deceased individual had and notify the relevant pension scheme administrators of their death, including whether there is a surviving spouse or civil partner.
   • Once notified, the pension scheme administrator begins their processes to determine benefit distribution. If the scheme is discretionary, trustees start their discretionary decision-making process.
   • Pension scheme administrators must inform personal representatives of the pension benefit value within 4 weeks of the death notification. This value includes all relevant unused pension funds and death benefits as of the date of death.
   • Once the pension scheme administrator’s processes are complete, personal representatives are told how the pension benefits will be split between exempt beneficiaries such as spouses and civil partners and non-exempt beneficiaries.
2. Stage 2 - personal representatives value the estate
   • The personal representative gathers information from each pension scheme administrator and other parts of the estate to determine the estate's total value and whether an inheritance tax account must be submitted to HMRC.
   • If an account is required, the personal representative will notify the pension scheme administrators, provide the inheritance tax reference number, and request necessary identity details about the pension beneficiaries.
   • The information requested from the pension scheme administrators will be limited to what is needed to complete the inheritance tax account.
3. Stage 3 - personal representatives file inheritance tax account and pay inheritance tax (if needed)
   • If no inheritance tax account is needed, personal representatives can tell pension beneficiaries and pension scheme administrators that no inheritance tax is due, and generally no further action is required regarding the pension part of the estate.
   • Personal representatives may proceed to apply for probate and distribute estate assets once no further action is required for pension benefits.
   • Pension scheme administrators will complete their processes to determine beneficiaries and distribute pension benefits.
   • If an inheritance tax account is required but no tax is due, personal representatives must submit the account to HMRC, then proceed with probate and asset distribution.
   • If inheritance tax is due, personal representatives will determine the tax amount attributable to pensions benefits and submit an account to HMRC.
   • Personal representatives will inform pension beneficiaries, if known, and the pension scheme administrator of the inheritance tax owed on their share of the estate.
   • There are several ways to pay the inheritance tax on pension benefits, these are set out in the How can inheritance tax due on pension funds be paid? section below.
4. Stage 4 - Distribution of pension benefits (pension scheme administrators and beneficiaries)
   • Once notified of a death, the pension scheme administrator and trustees start identifying pension beneficiaries and arranging benefit payments.
   • The pension scheme administrator informs beneficiaries of the amounts inherited and available options for receiving the benefits.
   • Exempt beneficiaries, such as spouses and civil partners, can receive benefits without delay.
   • Non-exempt beneficiaries are informed about potential inheritance tax due on their pension benefits and their joint liability for this tax with the personal representative. Beneficiaries have options to pay inheritance tax on their pension shares.
   • Inherited pension wealth may also be subject to income tax, depending on the deceased individual’s age and the type of benefit:
     • If the deceased individual died before age 75, death benefits are generally free of income tax.
     • If the deceased died at or after age 75, benefits are taxed at the recipient’s marginal income tax rate.
   • If a beneficiary requests the pension scheme administrator to pay inheritance tax liability, these payments will be authorised payments and will not be subject to income tax.
   • If the pension scheme administrator does not pay the inheritance tax on behalf of the beneficiary, the beneficiary may pay income tax on the benefits received and may need to contact HMRC for a refund.
5. Stage 5 - Amendments
   • Personal representatives manage amendments to the estate and submit updated inheritance tax accounts to HMRC.
   • If more inheritance tax is due after an amendment:
     • Personal representatives will notify pension beneficiaries, or the pension scheme administrator if beneficiaries are unknown, of the increase.
     • Additional inheritance tax can be paid using the previously outlined methods.
   • If less inheritance tax is owed, the personal representatives’ actions depend on whether probate has been granted. Inheritance tax refunds are generally issued only after the deceased individual’s account is settled.
     
     Personal representatives are responsible for distributing any refunds to the correct beneficiaries.
   • Pension beneficiaries must contact HMRC directly if amendments require adjustments to income tax on their inherited pension funds.

How can inheritance tax due on pension funds be paid?

• The inheritance tax can be paid from the free estate.
  • Inheritance tax may be settled using funds from the free estate. Personal representatives can pay the inheritance tax owed on the whole estate, including any pension component, directly from these funds before applying for probate.
  • If the same individuals are beneficiaries of both the free estate and the pension, they have the option to take their full pension benefits. In this case, they may claim a refund from HMRC for any income tax paid on the portion of their benefits used to cover the inheritance tax charge.
  • When the beneficiaries of the free estate and the pension benefits are not the same individuals, personal representatives have a legal right to recover from pension beneficiaries the amount of inheritance tax paid on the pension. This recovered amount can then be distributed to the beneficiaries of the free estate.
• The personal representative or pension beneficiaries ask pension scheme administrators to pay 
  
  • The personal representative or beneficiary may issue a "payment notice" to a registered pension scheme administrator, specifying the amount of pension inheritance tax charge due; this notice must state an amount of at least £1,000, but not exceed the total inheritance tax charge owed on the scheme's "notional pension property."
  • Upon receiving the notice, the scheme administrator becomes liable for the specified amount and must pay it within 35 days. 
• Pension beneficiaries take their pension benefits in full and pay inheritance tax directly
  • If the beneficiary takes the pension benefits in full, they can pay the inheritance tax directly and contact HMRC to arrange a refund for any income tax paid on the amount of the inheritance tax charge on their benefits.
  • The same pension benefits will not normally be subject to income tax and inheritance tax on. HMRC will ensure there are mechanisms in place for pension beneficiaries to recover any overpayments of income tax, if needed. The exception would be if any unauthorised payments are made from the deceased individual’s pension benefits.

Case studies

Inheritance tax is paid directly from free estate.

Derek's total estate value is £2 million, with pension assets accounting for £1 million. He dies at age 77 without children.

Mary is not the beneficiary for the free estate, but she is the pension beneficiary. She is classified as a non-exempt additional rate taxpayer.

Inheritance tax is calculated as follows:

• Estate subject to inheritance tax: £2,000,000 - £325,000 (nil-rate band) = £1,675,000
• Inheritance tax liability: £1,675,000 × 40% = £670,000

The personal representative pays the total charge, and recoups the £335,000 from Mary.

As a result, Mary receives: £1,000,000 (pension assets) minus £335,000 (payment of the inheritance tax to the personal representative) minus £299,250 (income tax at marginal rate), resulting in a net amount of £365,750.

Pension beneficiaries direct pension scheme administrators to pay​

Frank’s total estate value is £4 million, with pension assets accounting for £2 million. He dies at age 81 without children.

Rebecca is not the beneficiary for the free estate, but she is the pension beneficiary. She is classified as a non-exempt additional rate taxpayer.

Inheritance tax is calculated as follows:

• Estate subject to inheritance tax: £4,000,000 - £325,000 (nil-rate band) = £3,675,000
• Inheritance tax liability: £3,675,000 × 40% = £1,470,000

Rebecca directs the pension scheme administrators to pay £735,000 directly to HMRC towards the inheritance tax liability.

As a result, Rebecca receives: £2,000,000 (pension assets) minus £735,000 (payment to HMRC) minus £569,250 (income tax at marginal rate), resulting in a net amount of £695,750.

Pension beneficiaries take pension benefits in full and choose to pay inheritance tax directly to HMRC​

Veronica’s total estate is valued at £1 million, consisting entirely of pension assets. She dies age 79. She has no children.

There are no free estate beneficiaries; the sole beneficiary of the pension is Annabel who is a non-exempt additional rate taxpayer.

Inheritance tax is calculated as follows:

• Estate subject to inheritance tax: £1,000,000 - £325,000 = £675,000
• Net benefit after 45% income tax: £550,000
• Annabel pays inheritance tax directly to HMRC: £675,000 × 40% = £270,000

Annabel reclaims additional rate tax on the inheritance tax payment from HMRC: £270,000 × 45% = £121,500

As a result, Annabel’s receives: £550,000 (net benefit) minus £270,000 (payment to HMRC) add £121,500 (income tax reclaim) resulting in a net amount of £401,500.

Personal representatives issues a withholding notice

Corey died on 1 June 2027 leaving pension death benefits from a single DC scheme. His wife and daughter have both been nominated as beneficiaries; 50% each. 

Corey’s personal representative is in the process of gathering information regarding the assets within the estate, and it is evident that the estate will be subject to inheritance tax. However, they are still finalising the IHT400 and, as such, it cannot yet be submitted to HMRC. 

The personal representative issues a valid withholding notice to the pension scheme to prevent all of the benefits from being paid out before the inheritance tax situation is settled. 

The pension scheme administrator exercises discretion in appointing beneficiaries in accordance with Corey’s nomination. 

Since Corey’s wife is exempt from inheritance tax, the pension administrator arranges prompt payment of her benefit. 

The pension scheme administrator promptly notifies Corey’s daughter about the withholding notice. The administrator and the daughter then discuss her options regarding taking 50% of the benefit immediately and the necessity to wait for the remaining balance. 

Six months later, the personal representative files the completed IHT400 form and soon after receives the inheritance tax calculation from HMRC. At this stage, the pension scheme still has enough funds to pay the inheritance tax, giving both the personal representative and the daughter flexibility in their choices. 

What’s next?

The government will continue to collaborate with industry experts and stakeholders to improve the process for reporting and paying inheritance tax on pensions. HMRC will manage this through its stakeholder groups, gathering input to develop tools and guidance for PRs, PSAs, and beneficiaries before the changes take effect in April 2027.

The government will also publish draft legislation in due course on the changes to the information sharing regulations.

Frequently asked questions

Will inheritance tax be payable on pensions in all circumstances post 2027, regardless of any protections?

Most unused pension funds and death benefits will be counted as part of an individual’s estate for inheritance tax purposes. As a result, they may be subject to taxation upon death, regardless of whether the pension scheme had discretion over the allocation of the funds.

However, the government has confirmed that all death in service benefits and dependant’s scheme pensions are excluded.

Will the spouse or civil partner exemption still apply?

Yes. Death benefits paid to a surviving spouse or civil partner are exempt. Additionally, charity lump sum death benefits are also excluded from the valuation of an individual’s estate.

How will beneficiary drawdown be treated after 6 April 2027?

The draft regulations amend the Inheritance Tax Act 1984 to include pension drawdown benefits in the calculation of a person’s estate for inheritance tax purposes.

The income tax situation hasn’t changed so benefits are still tax-free if the deceased dies under age 75 – it’s tax-free assuming allocated to drawdown/ lump sum paid out - within 2 years starting on the date on which the scheme administrator first knew of the individual's death or, if earlier, the day when they could first reasonably have been expected to know of it. Benefits are taxable if the deceased died on or after age 75 at the recipient’s marginal rate.

Will any guarantee period payments from annuities be subject to inheritance tax if paid to someone other than the spouse, whether they’re taken as income payments or lump sums?

Yes. Annuity protection lump sum death benefits will be included in value of estate for inheritance tax.

Additionally, payments made under a scheme pension or lifetime annuity during a guaranteed term are included in the value.

Who will be responsible for paying the inheritance tax?

The personal representatives (usually the executors of the will) will primarily be responsible for reporting and paying any inheritance tax due on pension funds and death benefits. The personal representative and beneficiaries will have options for paying the IHT:

• The inheritance tax can be paid from the free estate.
• Pension beneficiaries ask pension scheme administrators to pay.
• Pension beneficiaries take their pension benefits in full and pay inheritance tax directly
  
  

Will beneficiaries pay income tax and inheritance tax on inherited pensions?

The existing income tax regulations regarding inherited pensions will remain in effect. For instance, where the deceased was aged over 75 at the time of death, any resulting death benefits will be subject to income tax at the beneficiary’s marginal rate.

However, to avoid the double taxation of the benefits, the draft regulations provide that income tax will not be payable on any portion of relevant death benefits equivalent to the inheritance tax due on that pension. HMRC will implement appropriate mechanisms to enable pension beneficiaries to reclaim any excess income tax paid.

The inheritance tax can be taken from the pension fund itself before any death benefits are paid out.

However, if the inheritance tax is not paid from the pension scheme, the individual may have to claim the overpaid income tax back from HMRC.

How do the death benefits get treated where death is on or after age 75

Like the question above, if inheritance is due on the funds, income tax is not payable on any portion of the relevant death benefits equivalent to the inheritance tax due on that pension.

However, if the inheritance tax is not paid from the pension scheme, the individual may have to claim the overpaid income tax back from HMRC

How will the pension and inheritance tax changes affect a spousal bypass trust?

Lump sum payments made into a bypass trust on death will be in scope and included in the deceased’s inheritance tax calculation.

Although the payment of the death benefit into the trust will not escape inheritance tax, the trust may still offer advantages. The trust will keep funds out of the spouse’s estate but being discretionary the trustees can advance funds to the spouse or even make loans to them.