Unused pension pots to be included in estates for IHT from April 2027

The Autumn Budget 2024 announced that unused pension funds and death benefits payable from a pension will be included within a person's estate for inheritance tax purposes from April 2027. The change reverses the long-standing position under which pension pots fell outside the estate and could be passed on free of IHT.

Currently, defined contribution pension pots are held in trust by the pension scheme and do not form part of the deceased's estate for IHT. From April 2027, the value of uncrystallised pension funds — and in most cases, drawdown funds — will be treated as part of the estate and taxed accordingly.

The practical impact is substantial. Many estates that currently sit below the IHT threshold will exceed it once pension funds are included. A client with a £300,000 estate and a £250,000 pension pot currently has no IHT liability. After April 2027, the combined £550,000 estate exceeds the nil rate band and attracts IHT on £225,000 — a liability of £90,000 that did not previously exist.

For solicitors, the immediate implication is that clients with significant pension pots should be made aware now and advised to review their estate planning before 2027. The pension scheme administrator will be responsible for paying the IHT attributable to the pension, but the interaction with the estate's overall IHT calculation will require careful co-ordination.

HMRC is consulting on the technical detail of how the new rules will operate, including the treatment of death-in-service benefits, annuities, and pensions already in drawdown. Final regulations are expected before the April 2027 implementation date.