Pensions and Inheritance Tax are about to change dramatically: preparing for April 2027

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From April 2027, most pension death benefits will fall within the scope of IHT through a new concept - notional pension property - which brings pension values directly into the estate calculation.

This is a profound departure from current practice, where most pension pots, particularly defined contribution (DC) funds, are excluded from the estate.

These reforms fundamentally shift pension‑based estate planning and require advisers to rethink client communications, update death‑benefit strategies and revise estate plans. This article outlines the key rules, exemptions, valuation mechanics, and the practical steps advisers must take over the next year.

Which pensions are in scope?

Unless specifically excluded, then virtually all UK pensions (including qualifying non-UK pensions) will form part of the estate. If a pension can pay a lump sum, even if a beneficiary chooses a different benefit option, or its value could reasonably be expected to be applied on death, it is brought into the estate unless it’s excluded.

Excluded and exempt benefits

Certain pension benefits will remain fully outside of the estate and therefore not exposed to IHT - these excluded benefits are:

1. Dependants’ scheme pension
2. Trivial commutation lump sum death benefit which extinguishes entitlement to a dependant’s scheme pension
3. Dependants’ annuity or nominees’ annuity purchased together with the member’s own lifetime annuity
4. Employment‑linked death benefits - payable for scheme members based on their employment history and otherwise would not be available

Death benefits (other than excluded benefits) may be exempt benefits where they form part of the estate but are not liable to IHT. The full suite of standard IHT exemptions apply to pension death benefits, but will typically be death benefits left to a spouse or civil partner, charities or registered clubs.

	Part of the estate	Subject to IHT
Excluded Benefits	No	No
Exempt benefits	Yes	No
Other death benefits	Yes	Yes

 

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Valuing pension death benefits

Step 1: Money Purchase (DC) Arrangements

Include all pension pot assets that may or must provide death benefits, plus any outside assets reasonably expected to be used for that purpose. This covers uncrystallised funds, drawdown funds, and unallocated DC assets.

Exclude amounts that can only provide excluded benefits.

Step 2: Defined Benefit Arrangements

Include mandatory lump‑sum death benefits, lump sums reasonably expected to be paid, and the value of scheme continuation payments.

Again, do not include excluded benefits.

Step 3: Calculate Total

Add Steps 1 and 2. The result is the member’s notional pension property—the IHT‑chargeable value added to the estate.

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New estate administration tools

Two new tools—withholding notices and payment notices—support personal representatives (PRs) in managing pension death benefits and settling associated inheritance tax (IHT). Advisers should understand when each applies and the risks they are designed to manage.

Withholding notices

A withholding notice temporarily restricts the payment of death benefits from UK registered pension schemes (not overseas schemes) while any IHT attributable to pension assets is resolved. Its purpose is to ensure sufficient funds remain available to meet the IHT charge on the deceased’s notional pension property.

A notice can be issued by an existing or prospective PR who knows, or reasonably believes, they may be responsible for settling the IHT arising from the pension.

While a withholding notice is in force:

• Excluded and exempt benefits may continue to be paid in full, however.
• No other beneficiary may receive more than 50% of their benefit entitlement.

The notice lapses on the earliest of: withdrawal by the PR, full payment of IHT and interest, or 15 months after the month of death.

Any scheme administrator paying benefits in breach of a notice becomes liable for the IHT attributable to the pension.

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Payment notices

Once the IHT attributable to a pension (and, where relevant, to individual beneficiaries) has been calculated, PRs or beneficiaries can issue a payment notice requiring the scheme administrator to pay IHT directly to HMRC.

Key points:

• Minimum amount: £1,000
• Payment due within 35 days (unless withdrawn)
• Benefits may be adjusted to reflect tax paid

Failure to comply leaves the scheme administrator liable for the tax.

Balancing IHT between beneficiaries

Where estate and pension beneficiaries differ, PRs can use their right of reimbursement to recover IHT paid on pension benefits from the pension beneficiaries. This avoids the wider estate subsidising tax arising from pension distributions made to others.

Are pension death benefits still subject to income tax?

The rules that govern income tax liability on death benefits are not changing.  Most death benefits (except dependant scheme pensions) are free of income tax if death is before age 75, though lump sums in excess of the lump sum and death benefit allowance (LSDBA) become subject to income tax. Where death occurs after age 75 all death benefits are subject to income tax.

This means that it will be common for death benefits to be exposed to both IHT and income tax. Though remember the income tax liability largely acts to recover the tax relief afforded to most pension contributions.

Where IHT is paid on pension death benefits and the same amounts would otherwise be taxed as pension income, income tax deductions are available to prevent double taxation.

Advisers’ priority actions for the next 12 months

With changes commencing in April 2027, advisers have a shrinking window to prepare. The following steps are essential. The prevailing belief that “pensions are outside IHT” is now outmoded. Client education is essential to avoid surprise tax liabilities for beneficiaries.

Identify at‑risk clients

Clients with:

• Large defined contribution pots
• Defined benefit lump‑sum entitlements
• International pensions
• Employer‑linked death benefit structures

Review nomination forms thoroughly

Beneficiary designations now drive IHT outcomes. Consider whether:

• Nominations should be rebalanced toward exempt beneficiaries
• Lump‑sum benefits should be restructured as dependants’ pensions where applicable

Forecast IHT exposure

Cash‑flow modelling must incorporate:

• The valuation methodology for notional pension property
• Drawing pension benefits and the income tax implications
• The effect of withholding notices on timing of payments to beneficiaries

Prepare for administrative friction

Expect:

• More correspondence with scheme administrators
• Increased importance of probate timing and certainty over estate executorship
• Potential disputes where withholding notices restrict early payments

Integrate cross‑tax planning

Advisers must navigate:

• IHT exposure
• Income tax implications
• Explaining the benefits of changing behaviour – such as the use of gifts and trusts

 

Next month, we’ll build on this by digging deeper into these planning considerations and what they mean in practice for helping clients plan their estates.
 

Conclusion: a new era of pension estate planning

From April 2027 the tax treatment of pensions on death will be reshaped and marks the end of pensions as a nearly universal IHT shelter. Advisers must now approach pensions as IHT‑exposed estate assets requiring careful planning, modelling, and communication. The next 12 months will be critical in reshaping advice frameworks and preparing clients for the new landscape from April 2027.

For further information and queries, please call one of our distribution team today, or refer to our TechVoice resources.

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