From 6 April 2027, most unused pension funds and pension death benefits will be included in the estate of a deceased person for inheritance tax purposes, marking a significant change to UK tax rules. Until now, many pensions were excluded, allowing them to be used as a tax-efficient wealth transfer tool rather than solely for retirement funding.
Executors Face New Responsibilities for Inheritance
Under the new rules, personal representatives, the individuals responsible for settling a deceased person’s estate, will be required to identify all pension savings, calculate their value, and pay any inheritance tax due. Executors will need to review bank accounts, personal records, and potentially contact multiple pension providers and insurance schemes. HMRC’s technical note does not yet specify what counts as “reasonable steps,” leaving families and executors with some uncertainty about how to comply.
Legal experts have highlighted practical challenges. Many estates involve fragmented records, historic workplace pensions, and multiple providers, making it difficult to track all assets. Online accounts and access credentials may also complicate matters, requiring careful management to avoid delays or errors in tax reporting.
Tax Treatment and Withholding
Inheritance tax currently applies at 40 percent on estates above a certain threshold. Pensions inherited after age 75 are generally only subject to income tax. Under the new rules, pensions will first be liable for inheritance tax, and income tax will only apply to the remaining balance to prevent double taxation.
HMRC will also allow pension providers to withhold up to 50 percent of lump sum benefits for up to 15 months to ensure tax is settled before payments are made. Executors or beneficiaries may request that pension providers pay the tax directly to HMRC.
Exemptions and Allowances
Some exemptions will remain. Married couples and civil partners can transfer unused tax-free allowances, allowing estates of up to £1 million to pass on tax-free. Death-in-service benefits, joint life annuities, and dependent pensions are largely exempt, though these payments may still need to be reported to HMRC.
Timeline for Implementation
HMRC plans to release detailed guidance over the next year. Draft regulations on information-sharing requirements are expected in spring 2026, with final regulations laid later that year. Stakeholder consultations and draft guidance will follow in autumn and winter 2026, and public guidance is expected in spring 2027, giving families and pension providers time to prepare.
The changes represent a major shift in estate planning, increasing the responsibilities of executors and altering how pensions are considered in inheritance tax. Families are advised to start preparing now to ensure compliance and minimize administrative difficulties when the new rules take effect.
