HMRC confirms major inheritance tax changes for pensions from April 2027

HMRC recently published detailed technical guidance on the forthcoming changes to the inheritance tax (“IHT”) treatment of pensions, following the enactment of the Finance Act 2026.

The changes, which will apply to deaths on or after 6 April 2027, are amongst the most significant developments in private wealth and succession planning in recent years and are likely to affect a wide range of individuals  with pension wealth.

For many years, pensions have occupied a particularly favourable position from an IHT perspective. In broad terms, unused personal defined contribution pension funds could often pass outside an individual’s estate on death whilst continuing to benefit from a highly tax-efficient environment during lifetime. HMRC’s latest guidance confirms that this position will fundamentally change from April 2027. According to Government calculations,this is forecast to impact 10,500 more estates paying IHT in its first year of inception. The average IHT liability is expected to increase by around £34,000.

A brief reminder of how the rules evolved

Following the introduction of pension freedoms in 2015, pensions increasingly became part of wider succession planning conversations. They were a means of building up funds that could be transferred  tax efficiently on death . This had made pensions  a key planning vehicle being used to benefit future generations. 

The government has now made clear that it considers that this development is not what the tax benefits of pensions were designed to promote, and instead, pensions are a way of saving to provide an income in retirement ntand existing tax rules are too beneficial for those looking to use pension to mitigate inheritance tax. 

What will change from April 2027?

Broadly, most unused pension funds and pension death benefits will be treated as forming part of a deceased’s estate for IHT purposes.

This is expected to include:

• unused defined contribution pension funds;
• drawdown funds remaining at death;
• certain lump sum death benefits; and
• some overseas pension arrangements.

Importantly, the new rules will apply regardless of whether pension trustees retain discretionary powers over death benefits.

What remains exempt?

Certain benefits will remain outside the IHT regime, including:

• transfers to spouses and civil partners;
• dependants’ scheme pensions;
• genuine death-in-service benefits;
• certain joint life annuity arrangements; and
• transfers to charitable beneficiaries.

HMRC has also confirmed that business property relief (“BPR”) and agricultural property relief (“APR”) will not apply to pension funds on the basis ‘notional pension property is neither “relevant business property”, nor “agricultural property”’ and therefore the member is not treated as owning the pension’s assets.

Increased complexity for estates and families

The technical guidance also highlights the additional administrative burden these changes are likely to create for families, personal representatives and advisers:

• Under the new framework:
• personal representatives will be responsible for reporting pension values and accounting for any associated IHT;
• pension scheme administrators will need to provide valuations and beneficiary information within prescribed timescales;
• personal representatives of estates will be able to direct pension scheme administrators to hold back 50% of a pension fund to cover forecasted IHT, costs, and any interest associated with the IHT due as payable within 15 months from date of death but will be compelled to act quickly to determine the position;
• personal representatives of estates will not be liable for IHT due on pensions discovered by them after obtaining a Certificate of Discharge;
• estates will require more detailed investigations into pension arrangements; and
• new withholding and direct payment regimes will apply to pension death benefits.

In practice, estates containing pension wealth are likely to become significantly more complex to administer and potentially slower to finalise. Prospective personal representatives will need to consider the additional burden and potential personal liability before accepting an appointment.

There is an inherent friction in the process as personal representatives are liable for tax on an asset which is managed and distributed by pension scheme administrators.

Where the beneficiaries of an estate and a pension fund are different, the liability to pay the tax is likely to cause disputes.

Why planning matters now

Although the new rules do not take effect until April 2027, the publication of HMRC’s guidance is an important reminder that individuals with pension wealth should consider reviewing their existing estate planning arrangements sooner rather than later.

For many people, pensions currently form a substantial part of theiroverall wealth. These changes may therefore have a material impact not only on potential IHT exposure, but also on liquidity, estate administration and the practical burden placed on family members after death.

Areas which may merit review include:

• pension nominations and expression of wishes forms;
• wider estate and succession planning structures;
• lifetime gifting arrangements;
• nil rate band and spouse exemption planning;
• liquidity planning to meet future tax liabilities; and
• non-UK pension arrangements.

There is also likely to be increased focus on the interaction between IHT and income tax, particularly where beneficiaries may ultimately face both charges in relation to inherited pension funds.

Next steps

The new rules will apply to deaths occurring on or after 6 April 2027.

Further draft regulations and HMRC guidance are expected throughout 2026, with final operational guidance anticipated in spring 2027.