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From April 2027, unspent pension funds will form part of your taxable estate for inheritance tax. This is arguably the biggest single IHT change of the decade — pensions have been outside the estate since the pension freedoms reforms, and using a pension as an IHT vehicle has been entirely legitimate and widely used. That changes from April 2027.
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This guide explains the mechanics, worked examples, and planning options. For a broader view of recent IHT changes see our guide to pensions and inheritance tax from April 2027 and Autumn Budget 2025: Inheritance Tax Changes.
Under the rules that apply until 5 April 2027, defined contribution pension funds — including SIPPs, personal pensions, workplace money purchase pensions — sit entirely outside the estate for IHT. This means:
This made pension funds an extremely effective IHT planning tool. Many financial planners advised clients to draw down other assets first — ISAs, property, savings — and preserve pension funds as long as possible to minimise IHT. A couple with £1m in pension funds could pass all of it to their children with zero IHT, regardless of the rest of their estate.
From 6 April 2027, unspent defined contribution pension funds and unused death benefits will be included in the deceased's estate for IHT purposes. The full value of unspent pension funds at the date of death will be aggregated with the rest of the estate when calculating whether IHT is due.
The pension funds themselves do not change — the money remains in the pension wrapper during the deceased's lifetime. What changes is the IHT treatment when those funds are passed on.
The pension fund value at death will be added to the taxable estate. The nil-rate band (£325,000) and RNRB (£175,000 where applicable) will be applied to the whole estate including pensions. IHT will be charged at 40% on the excess above the available nil-rate bands.
Pension trustees will be responsible for paying the IHT attributable to the pension funds. This is a significant change — previously, pension trustees had no role in the IHT process. Beneficiaries will receive the net-of-IHT pension balance.
A double tax concern arises: pension funds already face income tax when drawn by beneficiaries (if the deceased was 75 or over). From April 2027, those same funds will also be subject to IHT. The government has indicated it will consult on whether a credit or adjustment will be available to prevent full double taxation, but as of now, both taxes could apply.
Under old rules:
Pension £600k is outside estate. Other estate £800k passes to wife — spouse exemption applies. No IHT on first death. Wife's estate on second death: up to £1m (her assets + inherited assets + his unused NRB/RNRB). Potentially manageable IHT position.
Under new rules from April 2027:
Pension £600k is now in the estate. However, spouse exemption still applies — everything passing to spouse is IHT-free. IHT deferred to wife's death. At wife's death: estate could include her own pension, inherited pension, house and other assets — potentially facing 40% on amounts over £1m.
Key takeaway: For couples, spouse exemption remains; the crunch comes on second death.
Under old rules:
Taxable estate: £550,000 (house + savings). Pension excluded. IHT: (£550k − £325k) × 40% = £90,000.
Under new rules from April 2027:
Taxable estate: £1,050,000 (all assets including pension). IHT: (£1,050k − £325k) × 40% = £290,000.
Additional IHT due to pension inclusion: £200,000.
If your estate will be above the IHT threshold, it may be more tax-efficient to draw pension income and gift or invest the proceeds rather than leaving funds in the pension to be taxed at 40% on death. Drawn funds may be subject to income tax (up to 45%), but once in your hands can be gifted using the normal expenditure out of income exemption or used to fund regular gifts.
Using pension income to fund lifetime gifts removes assets from the estate. The full range of gifting strategies remains available. In particular, normal expenditure out of income exemption has no annual limit and is ideal for regular pension drawdown that exceeds living costs.
Pension nominations determine who receives the pension on death. Spousal nominations remain IHT-efficient (spouse exemption applies). Nominations to children or grandchildren will now involve IHT — and potentially double taxation where income tax also applies. Reviewing nominations in the context of the overall estate plan is important.
A whole-of-life insurance policy written in trust can be sized to cover the expected IHT on pension funds. The policy payout falls outside the estate (if in trust), providing liquidity to pay IHT without reducing the pension passed to beneficiaries. See our guide to life insurance in trust.
Despite Budget changes, gifting remains the most powerful IHT tool available. Annual exemptions, gifts out of income, PETs, and more — what still works in 2025/26.
A life insurance policy written in trust pays out outside your estate, avoiding IHT on the proceeds. How trusts work, which to use, and the steps to set one up.
Discretionary trusts face a 10-year periodic IHT charge and an exit charge when assets leave. How the calculations work, what rates apply, and when trusts still make sense.
Regular gifts from surplus income are completely exempt from IHT with no annual limit. How the exemption works, what HMRC requires, and how to document it correctly.
The way you jointly own property affects IHT on death. Joint tenants pass by survivorship; tenants in common pass by will. Which is better for IHT planning?
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