Pensions and Inheritance Tax from April 2027: What Executors Need to Know Now

What is changing from April 2027?

Under the current rules (before April 2027), most pension death benefits — whether paid as a lump sum or as continuing pension payments to a dependant — fall outside the deceased's estate for IHT purposes. This is why pensions have become a popular tool for passing wealth to the next generation: they avoid both probate and inheritance tax.

From April 2027, this exemption is removed for unused pension funds. Specifically:

• Unspent funds in defined contribution pensions (personal pensions, SIPPs, workplace pensions with remaining funds) will be included in the taxable estate at the date of death
• The pension fund value is added to all other estate assets; IHT at 40% applies to the total above the available nil-rate bands
• The personal representatives must report the tax attributable to each pension scheme and are liable to pay it; beneficiaries are jointly liable for the tax on benefits they receive
• The spouse, civil partner and charity exemptions continue to apply, so a pension left to a surviving spouse or civil partner is exempt

Who is affected?

These changes primarily affect estates where the deceased held a defined contribution pension with remaining unspent funds at the time of death. This includes:

• Personal pension plans
• Self-Invested Personal Pensions (SIPPs)
• Workplace pension schemes where the member had not yet drawn down all their funds

Defined benefit (final salary) pensions work differently: they typically pay a spouse's or dependant's pension rather than a lump sum. Dependants' scheme pensions from a defined benefit or collective money purchase arrangement are excluded from the change, as are death in service benefits payable from a registered pension scheme.

HMRC estimates that in 2027 to 2028, of roughly 213,000 estates with inheritable pension wealth, 10,500 will have an inheritance tax bill they would not otherwise have had, and 38,500 will pay more than they would have done. The average liability is expected to rise by around £34,000 where pension assets are brought in.

The withholding mechanism: up to 50% for up to 15 months

The mechanism is not something the pension scheme decides on its own. Where the personal representatives expect inheritance tax to be due, they can direct the scheme administrator either to pay the tax attributable to the pension straight to HMRC, or to reimburse them for tax they have already paid. Where such a direction is made:

• The beneficiary can access only 50% of the pension death benefits
• For up to 15 months from the date of death
• Until the tax attributable to the pension has been settled

So beneficiaries may initially receive only half of what they expected while the tax is dealt with. Where no direction is made — including where no inheritance tax is due — this does not apply.

For a dedicated guide on the withholding rule, see our guide to inherited pensions being frozen.

New executor responsibilities from April 2027

The April 2027 changes place the reporting and payment duty on the personal representatives. Under the new rules they will need to:

1. Notify all pension providers of the death promptly. The executor needs to identify all pensions held by the deceased and notify each provider. The sooner this is done, the sooner the 15-month clock starts running.
2. Obtain pension fund values as at the date of death. Each pension provider will need to confirm the fund value at the date of death, which forms part of the IHT calculation.
3. Include pension funds in the IHT return (IHT400). The pension values must be declared as part of the estate on the IHT400 form.
4. Report the tax attributable to each scheme, and pay it. The personal representatives may direct a scheme to pay that tax from the pension instead. Where they have made every effort to trace the deceased's pensions, they can be discharged from liability for a pension found after clearance.

This is a considerably more complex process than the rules that applied before, and HMRC has said further guidance — including on how inheritance tax and income tax interact on inherited pensions — is still to come.

Timeline for the changes

• October 2024: Announced in the Autumn Budget
• October 2024 – January 2025: Technical consultation. The original proposal made pension scheme administrators liable for reporting and paying the tax
• 21 July 2025: Government confirms the liability sits with personal representatives instead, and that death in service benefits are out of scope
• April 2027: Changes take effect for deaths occurring on or after 6 April 2027

If your loved one died before April 2027, the current rules still apply — pension funds are outside the estate for IHT purposes.

What to do now if your loved one has a pension

Whether you are dealing with an estate now or planning for the future, the practical steps are:

1. Check what pension or pensions your loved one held — personal pensions, SIPPs, and any workplace schemes
2. Contact each pension provider to notify them of the death (even before April 2027, this is an important step for estate administration)
3. Ask the pension provider what their process is for the death benefits — and, after April 2027, how they will handle the IHT withholding process
4. Check whether the benefits pass to a surviving spouse or civil partner, or to charity, in which case they are exempt from inheritance tax

For further context on pensions after death, see our guide on claiming private and workplace pensions and our guide on pension death benefits and nomination forms. Pensions are just one of the assets you need to track after a death —