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?

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.

Finance Act 2026 received Royal Assent on 18 March 2026 and put the main inheritance tax changes for pensions into law for deaths on or after 6 April 2027. HMRC has also published draft regulations on the information-sharing requirements between personal representatives and pension scheme administrators, alongside a technical note explaining how the new rules are expected to work in practice.

• 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. 
• 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. 
• The legislation also provides that notional pension property is not eligible for business property relief or agricultural property relief.
• 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 obligations to communicate the potential tax consequences of decisions and paying inheritance tax through the new Pensions Direct Payment Scheme.
• The Finance Act 2026 contains legislation that allows legal personal representatives or prospective personal representatives to request a scheme withholds up to 50% of the benefit entitlement 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 excluded benefits or paid to an exempt beneficiary.
• 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.
• The existing exemption from inheritance tax for pension death benefits passing to a surviving spouse or civil partner will be maintained. 
• The new rules apply where the pension scheme member dies on or after 6 April 2027. If death occurs before that date, the current inheritance tax rules apply even if benefits are paid after 6 April 2027.

What are excluded benefits? 

Dependants’ scheme pension

A dependants’ scheme pension is an authorised death benefit paid to a dependant after an individual’s death.

Trivial commutation

A trivial commutation lump sum death benefit which extinguishes a beneficiary’s entitlement to a dependants’ scheme pension.

Joint life annuities

A dependants’ annuity, or a nominees’ annuity which was purchased when the individual's annuity was set up. 

Death in service benefits

These are any amounts that are payable as a benefit (in any form) in respect of a member of the scheme if the member is in employment or other work of a particular description, immediately before their death.

 Who may be treated as an exempt recipient for IHT purposes?

• spouses and civil partners, where they are long-term UK residents
• charities
• registered clubs
• gifts made to political parties
• gifts made to housing associations
• gifts made for national purposes
• maintenance funds for historic buildings

How will the withholding notice work?

If the personal representative or prospective personal representative reasonably believes inheritance tax will be due, they can instruct scheme administrators to hold back 50% of the the benefit entitlement (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 exempt beneficiaries or excluded benefits) 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. 

Personal representatives and prospective personal representatives

Since the legislation allows both personal representatives and prospective personal representatives to issue withholding notices, pension scheme administrators are required to confirm the identities of these individuals. HMRC's technical note sets out what is acceptable. However, it is not an exhaustive list and HMRC notes that scheme administrators may consider reasonable alternatives.

Will exists

A pension scheme administrator may request: a copy of the will and codicil naming the executor; proof of the executor’s identity; a signed declaration of acceptance; and confirmation that the executor is either sole or able to act independently. If executors cannot act independently, identification for all must be provided. Where an executor appoints someone else, a copy of the appointment and ID for the appointee should be submitted. If the named executor cannot act, the pension scheme administrator will follow the procedures as if no will exists.

No will

Different procedures exist across England and Wales, Scotland, and Northern Ireland for determining who qualifies as a prospective personal representative, as explained in HMRC's technical note. Scheme administrators can reasonably request proof of identity along with a signed statement. This declaration should state the individual’s connection to the deceased, their belief that no will was left, and confirm that they are handling the estate with the expectation of becoming the deceased’s personal representative.

What pension death benefits are in scope?

What pension death benefits aren’t in scope?

Information sharing requirements

The new inheritance tax framework for pensions will rely heavily on timely and accurate information sharing between personal representatives, pension scheme administrators, beneficiaries and HMRC.

HMRC has set out an expected approach in its technical note.

Personal representative's responsibilities

They will be responsible for:

• notifying pension schemes of the death and requesting values and splits between beneficiaries
• confirming their status as personal representative or prospective personal representative
• providing any required supporting information
• supplying the inheritance tax reference number once obtained.

They must use the information received to:

• value the overall estate, including pension benefits
• determine whether inheritance tax is due
• submit the inheritance tax account (IHT400)
• calculate how much of the deceased individual's lump sum and death benefit allowance has been used by the relevant lump sum death benefits
• if the deceased individual's lump sum and death benefit allowance has been exceeded, they must notify HMRC by the later of:
  • 13 months after the date of death
  • 30 days after the date on which they become aware that the allowance has been exceeded.

Information provided by pension scheme administrators

They are expected to:

• confirm the value of pension benefits at the date of death
  • must be provided within 28 days of receiving the request
• identify which benefits are in scope of inheritance tax
• provide details of potential or actual beneficiaries - must be provided by the later of:
  • 28 days from the date the request is received, or
  • 14 days after beneficiaries are determined
• distinguish between exempt and non-exempt beneficiaries - must be provided by the later of:
  • 28 days from the date the request is received, or
  • 14 days after beneficiaries are determined
• to enable the personal representatives to calculate how much of the deceased individual’s lump sum and death benefit allowance has been used by the relevant lump sum death benefits, the pension scheme administrator must confirm:
  • the tax-free lump sum death benefit paid
  • inheritance tax paid by the pension scheme directly to HMRC, if any
  • within 3 months of the final payment

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 "Pensions Direct Payment Scheme notice" to a registered pension scheme administrator, specifying the amount of inheritance tax due on the notional pension property; this notice must state an amount of at least £1,000, but not exceed the total inheritance tax charge (including interest) 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. 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 or a spouse or civil partner. 

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 living in England. 

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 or a spouse or civil partner. 

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 living in England. 

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 or spouse or civil partner. 

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

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?

HMRC published its technical note on 11 May 2026 and draft information-sharing regulations on 18 May 2026. The current plan is for the regulations to be made and laid later in 2026, with further guidance, templates for withholding and payment notices, and support tools to be published ahead of implementation in April 2027.

Frequently asked questions

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

No. Whilst most unused pension funds and death benefits will be brought into account for inheritance tax on deaths on or after 6 April 2027, not all benefits are in scope. For example, registered death in service benefits are excluded, and exemptions can still apply where benefits pass to an exempt beneficiary, such as a spouse or civil partner where the spouse/civil partner exemption applies, or to a charity or registered club.

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?

Finance Act 2026 amends the inheritance tax legislation so that most unused pension funds and death benefits, including drawdown funds, are brought within the value of the deceased’s estate for inheritance tax purposes from 6 April 2027. 

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 of income tax.

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.