From 6 April 2027, unused pension funds will be included in the value of an estate for inheritance tax (IHT) purposes. This applies to registered pensions, qualifying non-UK schemes, and section 615(3) schemes. However, employer-paid death-in-service benefits remain outside IHT rules for now.
The change means personal representatives must report and pay any IHT due on unused pensions, with the usual six-month deadline applying. Pension scheme administrators won’t be responsible for tax reporting, despite earlier Government plans. This decision followed strong objections raised during consultation.
HMRC currently lacks a system to manage the new tax rule, and developing one is expected to put a strain on its resources. IHT processes are not yet digitised, adding to the challenge.
The Treasury expects the change to generate £640 million in its first year and £1.34 billion annually by 2028–29. Around 40,000 estates could be affected, with an average extra tax bill of £34,000.
The move follows concerns that pensions are being used for tax planning rather than retirement. It was first outlined in the Autumn Budget 2024 and will be legislated through section 150A of the Inheritance Tax Act 1984.
Inherited pension wealth may also face income tax. If the pension holder dies before age 75, benefits are usually tax-free. If they die at 75 or older, recipients will pay income tax at their marginal rate.
Existing IHT exemptions for pensions passed to spouses, civil partners, or charities will still apply.
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