Pensions and inheritance tax from 6 April 2027: what the Act says, and what to settle before then
For deaths on or after 6 April 2027, unused pension funds and most pension death benefits count as part of the estate for inheritance tax. This is already law, in sections 66 to 71 of the Finance Act 2026. Executors become liable for the tax, can hold back half of what each beneficiary would otherwise receive for up to 15 months, and can require the pension to pay the tax within 35 days. Where the pension's main asset is a building, that is where the thinking needs to start.
What changes, and when
Until now most pension savings have sat outside the estate for inheritance tax, because death benefits are usually paid at the discretion of the pension's administrator rather than as of right. For deaths on or after 6 April 2027 that stops being true. Section 66 of the Finance Act 2026 inserts a new section 150A into the Inheritance Tax Act 1984, under which a member of a registered pension, or of certain overseas and employer arrangements, is treated as beneficially entitled, immediately before death, to what the legislation calls notional pension property. For a defined contribution pot, broadly, that is the value that may or must be used to provide benefits on death. For a defined benefit arrangement, it is the lump sum death benefits that must be paid or can reasonably be expected to be paid. Deaths before 6 April 2027 are untouched, whenever the benefits are actually paid out. The government's impact note, published on 26 November 2025, expected around 213,000 estates to have inheritable pension wealth in 2027/28, of which 10,500 would pay inheritance tax for the first time and 38,500 would pay more, by an average of about GBP 34,000. Those are the estates of people who are, for the most part, alive and able to act now.
What stays outside
The Act lists excluded benefits, and a benefit is excluded only if it can be paid in no other form. A dependant's pension paid for life under a defined benefit or collective money purchase arrangement is excluded, although a dependant's drawdown fund is not. So are lump sums and other benefits payable only because the member was in employment or other work at death, which is what keeps death-in-service benefits outside the charge. A dependant's or nominee's annuity bought together with the member's own lifetime annuity is excluded, as is a small commutation lump sum that extinguishes a dependant's pension. A joint-life annuity that simply stops on death leaves nothing to value. Separately from those exclusions, the ordinary exemptions reach pension benefits: what passes to a spouse or civil partner is exempt, and so is what goes to a charity. Everything else paid on death from a pension pot, whether as a lump sum or into drawdown for a beneficiary, is in the estate.
Who pays, and the two notices
The personal representatives are liable for the tax on the pension as well as on the rest of the estate, and a beneficiary who receives pension benefits is liable too. The pension's trustees are not, and the administrator becomes liable only by paying out in breach of a withholding notice or by failing to act on a payment notice. Those two notices are the machinery that matters. A withholding notice, under new section 226A, can be given by personal representatives, or by someone who expects to become one, if they believe there may be tax attributable to the pension. While it has effect, no beneficiary may be paid more than 50 per cent of their entitlement. It lasts until it is withdrawn, until the tax and interest have been paid, or until 15 months after the end of the month of death, whichever comes first, and it cannot hold back an excluded benefit or a benefit going to an exempt beneficiary such as a spouse. A payment notice, under section 226B, can be given by the personal representatives or by a beneficiary, and requires the administrator to pay the tax specified before the end of 35 days beginning with the day the notice is received. The amount must be at least GBP 1,000, and tax for this purpose includes interest. The tax itself is due, as for any estate, six months after the end of the month of death, with interest running after that. One protection is worth knowing about: personal representatives who obtain a certificate of discharge are not liable for tax on pension property discovered afterwards unless their failure to disclose it was careless. The word careless is doing a lot of work there, and the practical answer is that executors need to know every pension exists.
The income tax layer, and an illustrative figure
Inheritance tax does not replace income tax on pension death benefits. It sits alongside it. Where the member dies before 75, most death benefits are usually free of income tax, subject to the lump sum and death benefit allowance. Where the member dies at 75 or over, benefits are taxed as income in the beneficiary's hands. The Act gives some relief for the overlap, in new section 567B of the Income Tax (Earnings and Pensions) Act 2003, by allowing inheritance tax paid on the benefit to be deducted from the taxable pension income it relates to. That is a deduction from income, not a credit against tax, and the difference is large. Take an illustration, not anyone's affairs: a member dies aged 80 after 6 April 2027, with the nil rate band already used by the rest of the estate, leaving a GBP 400,000 pot to an adult child who is already an additional-rate taxpayer outside Scotland, draws it all, and pays the inheritance tax on it. Inheritance tax at 40 per cent is GBP 160,000. The taxable income is GBP 400,000 less that GBP 160,000, and at 45 per cent the income tax is GBP 108,000. Together the two taxes take GBP 268,000, which is 67 per cent, leaving GBP 132,000. Drawn more slowly and at lower marginal rates the income tax would be less, but the inheritance tax would be the same.
The residence nil rate band taper
The nil rate band stays at GBP 325,000 and the residence nil rate band, available where a home passes to direct descendants, at GBP 175,000, both fixed through to the 2030/31 tax year. The residence band tapers away by GBP 1 for every GBP 2 by which the estate exceeds GBP 2 million, and section 8D of the 1984 Act measures that by the value of the estate immediately before death. Because section 150A treats the member as entitled to the pension property immediately before death, the pension now counts towards that GBP 2 million, including a pension that goes to a surviving spouse and is itself exempt. An illustration shows the double effect. A parent who is single and has no transferable nil rate bands leaves a home worth GBP 900,000 and other assets of GBP 600,000 to their children, together with a pension of GBP 800,000. Before the change, the estate is GBP 1,500,000, the full GBP 500,000 of bands applies, and the tax is GBP 400,000. After it, the estate is GBP 2,300,000. The residence band falls by GBP 150,000 to GBP 25,000, only GBP 350,000 of bands remains, and the tax is GBP 780,000. The increase of GBP 380,000 is GBP 320,000 of tax on the pension itself and GBP 60,000 from the residence band the pension has taken away.
Where the pension owns property
Many owner-managers and professional landlords hold commercial property in a small self-administered pension or a self-invested personal pension, often the premises their own business occupies. The new rules were not written with those arrangements in mind, and HM Revenue and Customs acknowledges in its technical note that some pensions hold illiquid assets such as property. The problem is timing. Interest on the tax runs from six months after the end of the month of death. A beneficiary or executor can serve a payment notice at any point, and the administrator must then pay within 35 days. A pension whose main asset is a building, perhaps let to the family company, may have no cash to do that, and selling a commercial property within weeks, or on terms dictated by a tax deadline, rarely produces its best price. None of this is a reason to change anything in a hurry. It is a reason to know, before April 2027, what the property is worth today, how much cash the pension holds, what the tax would be on a death next year, and where the money would come from.
What to settle before 6 April 2027
Six things, none of them complicated. First, obtain a current value for every pension, including a proper valuation of any property inside one, and a statement of the death benefits each would pay. Second, review the nominations and expressions of wish, remembering that what passes to a spouse or civil partner is exempt and cannot be withheld, but that it adds to the survivor's own estate on the second death. Third, run the estate figures twice, with and without the pensions, to see whether the residence nil rate band taper now bites. Fourth, make sure the likely executors know which pensions exist and where the paperwork is, because the protection they rely on disappears if they are careless. Fifth, for any pension holding property, decide how a tax bill would be met within the notice periods. And sixth, only after all of that, look at the wider questions with an adviser, such as lifetime gifts, the exemption for regular gifts made out of surplus income, and whether drawing pension income to fund them makes sense once income tax is counted. Those last questions have different right answers for different families. The first five have the same answer for everyone, and they are all easier done in the months before April 2027 than by executors afterwards.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.