Pensions and Inheritance Tax (IHT) – From 6 April 2027

This briefing sets out the IHT treatment of pension scheme death benefits from 6 April 2027, covering exclusions, exemptions and crossover with income tax.

Core considerations

• From 6 April 2027, most pension death benefits and unused pensions will be included in a client’s estate for IHT purposes.
• Certain pension death benefits will be excluded from client estates.
• Spouse/civil partner and charity exemptions to IHT will apply to pension death benefits.
• Pension death benefits will still be settled under pension scheme rules, meaning discretionary death benefits will continue to bypass personal representatives, and not usually be paid in line with the estate.
• New estate management tools will help personal representatives manage IHT liabilities.
• See our article Pensions and IHT – Prior to April 2027 for details of how pensions interact with IHT on death prior to 6 April 2027.

Where death occurs from 6 April 2027

The Finance Act 2026 sets out that most unused pension funds and pension death benefits will be treated as part of the deceased’s estate for IHT purposes for deaths that occur after 5 April 2027. This reform removes the distinction between discretionary and non-discretionary arrangements, aligning pensions with other inherited assets and reduces pension efficiency for wealth transfer.

• Which pensions will be included in the estate?
• Excluded and exempt benefits
• Calculating the notional value
• Are pensions settled in line with the estate?
• Who will be responsible for settling IHT on pension benefits
• Withholding notice
• Payment notice
• IHT and income tax considerations
• Refunds of overpaid IHT
• Lump Sum Death Benefit Allowance (LSDBA) and IHT with multiple lump sums
• Charity lump sum death benefits
• Pensions and Business Relief or Agricultural Relief

Which pensions will be included in the estate?

For death’s after 5 April 2027, the majority of pension death benefits and unused pensions will be included in the estate through a new concept – notional pension property, which brings pension values directly into the estate.

Three categories of pension arrangements are brought into estates:

• Registered pension schemes - This includes the vast majority of UK pension vehicles, including: personal pensions, SIPPs, workplace defined contribution (DC) schemes, defined benefit (DB) schemes and master trusts.
• Qualifying non‑UK pension schemes - International schemes that meet UK recognition criteria – notably qualifying recognised overseas pension schemes (QROPS).
• Section 615(3) schemes - Legacy overseas arrangements for expatriate employees

Employer financed retirement benefit schemes (EFRBS) and family pension trusts (FPTs) are not covered by the Finance Act 2026 because they are already within the scope of IHT.

In practice, this means the value of any of the above pensions used to provide any of the following pension death benefits will be included in a client’s estate:

• Funds that purchase dependants’, nominees’ and successors’ drawdown or annuities
• Defined benefit lump sum death benefit
• Uncrystallised funds lump sum death benefit
• Flexi-access drawdown and drawdown lump sum death benefits
• Annuity protection and pension protection lump sums
• Continuing payments under a guarantee period - see HMRC’s IHT guaranteed annuity calculator for valuing remaining payments under a guarantee period
• Most trivial commutation lump sum death benefits – unless paid from a dependant’s scheme pension

This covers benefits paid from the client’s own pensions and any pensions they have inherited – i.e. beneficiary drawdown. If pension death benefits pass through multiple nominee or successor drawdown arrangements, they may face IHT following each death—the same way as any other asset passing through generations.

Excluded and exempt benefits

Certain pension benefits will remain fully outside of the estate and therefore not be exposed to IHT - these are excluded benefits and are benefits that may only be paid in the following forms:

• Dependant’s scheme pension
• Trivial commutation lump sum death benefit which extinguishes entitlement to a dependant’s scheme pension
• Dependants’ annuity or nominees’ annuity purchased together with the member’s own lifetime annuity
• Employment‑linked death benefits that are 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 applies to pension death benefits, with the main ones typically being death benefits left to a spouse, a civil partner, charities or registered clubs.

Calculating the notional value

The calculation of notional pension property that is added to the estate will differ depending on the type of pension scheme.

Defined contributions (DC) schemes hold a set pot of money – the fund value remaining at death is the notional pension property.

Defined benefit (DB) schemes - Most DB schemes are unique, offering a mix of lump sum and dependants’ scheme pensions.​ Death benefits are typically based on a percentage of the member’s accrued annual pension at death – or a fixed lump sum at death.​ The value of the death benefits will be determined by the scheme. A number of DB death benefits are Excluded benefits, so will not form part of the estate.

Lifetime Annuities - payments typically cease following the member’s death – so there is no value that could be added to the estate. However, when a lifetime annuity is purchased, there is a range of options that may be selected that result in payments after the member’s death.

1. Remaining payments under a guarantee period at death are valued as part of the estate using the HMRC guaranteed annuities calculator – this does not total remaining payments.
2. The value payable under Annuity Protection is added to the estate – this being the protected amount of the annuity purchase price minus payments made to date of death.
3. Dependants’ annuities and nominees’ annuities purchased when the member purchased their lifetime annuity are excluded benefits. ​

Are pensions settled in line with the estate?

Just because pension death benefits will be included in estates for IHT valuation purposes does not mean that pension benefits will be settled in line with the estate.

Pension scheme rules will continue to determine how pension death benefits are settled.

• Schemes which provide discretion to the trustees or scheme administrators will continue to follow their existing process to determine the beneficiaries. In which case most benefits are paid direct to the selected beneficiaries – otherwise bypassing the estate.
• Schemes which must pay death benefits in a prescribed manner, including settling lump sums to the estate, will continue to do so.

It’s therefore important to understand the death benefits available from pension schemes, and how those benefits are settled. Ensure that client nominations are up to date, as who the trustees choose to benefit will now drive IHT outcomes. Keeping nominations up to date provides a clear indication of who the client wishes to benefit. For benefits that must be settled to a client’s estate ensure that a client’s will clearly reflects how those benefits should be distributed.

Who will be responsible for settling IHT on pension benefits?

It is important to understand not just what benefits are subject to IHT, but also who is liable to settle any IHT in respect of pension death benefits.

Personal Representatives (PRs)

• Executors or administrators will be liable for IHT reporting for all estate and pension assets, and will be liable for settling IHT.
• See our article on Inheritance tax on death for more information on calculating the value of an estate on death.

Pension Beneficiaries are not specifically liable to IHT, though they may bear the burden for IHT if: PRs reduce a beneficiary entitlement from the free estate, or the beneficiary is required to settle IHT from their own assets.

Pension Scheme Administrators (PSAs) of registered pension schemes (not overseas pensions) will become jointly liable for IHT if:

They pay benefits in breach of a withholding notice – the PSA becomes liable to the IHT attributed to the pension They fail to pay tax required within the 35 day limit under a payment notice – PSA liability is capped to the tax they were requested to settle – which may include interest for late settlement. Trustees of pension schemes are explicitly carved out from IHT liability.

Withholding notice

A withholding notice is designed to prevent pension benefits being paid out in full before the tax position is established, protecting the PRs while allowing them time to assess fair allocation of liabilities between beneficiaries.

Who can issue a withholding notice?

A withholding notice can be issued by existing or prospective personal representatives who know or reasonably believe, they may be responsible for settling the IHT arising from notional pension property. A prospective personal representative is typically the executor named in the will but where probate has not yet been granted, or the person applying for probate.

Effect of a withholding notice

While a withholding notice is in place:

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

This creates a freeze on half of the death benefits that may be subject to IHT – ensuring that sufficient value is held back in case the pension property is fully subject to 40% IHT, and potentially accrued interest.

In practice this means that any pension death benefits for a spouse or civil partner can continue to be paid in full, along with dependants’ scheme pensions and dependants’ or nominees’ annuities.

Scheme Administrators that pay benefits in breach of a withholding notice become jointly liable to the IHT attributable to the notional pension property.

Any scheme rule that attempts to require payment of benefits above the 50% cap contrary to the withholding notice is void.

Withholding notice duration

A withholding notice remains in force until the earliest of:

• Its withdrawal by the PR/prospective PR
• The payment of all IHT attributable to the scheme’s notional pension property — plus interest
• Its expiry which will occur automatically 15 months after the end of the month of death

If a payment would have fallen due but was blocked by the withholding notice, it becomes due immediately when the notice ceases.

Payment notice

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.

Once the scheme administrator receives a valid payment notice, they must pay the specified tax within 35 days, unless:

• (a) The notice is withdrawn - The beneficiary or PR can retract the instruction at any time before payment, or
• (b) The notice is invalid - If the notice fails to meet the statutory requirements, or if it becomes non‑compliant before payment, the PSA does not need to act.

Requirements

• The payment notice must specify the tax amount (minimum £1,000).
• A beneficiary cannot request payment exceeding the benefits payable to themself, minus any amounts already paid or already requested via earlier notices.
• PRs cannot request payment exceeding total scheme death benefits payable, minus any amounts already paid or already the subject of other payment notices.

The payment notice is limited to the tax attributable to the notional pension property of the scheme. This ensures the PRs or beneficiaries cannot “over‑draw” tax from the scheme to settle wider IHT liabilities.

When determining the total scheme benefits this should include any amount that has been or will in future be payable. Where the exact amount of benefits is unknown appropriate actuarial assumptions can reasonably be used.

Scheme administrator considerations

There are a number of points to understand when settling a payment notice:

• PSAs that fail to pay tax required under a payment notice become jointly liable to the IHT they were requested to settle – which may include interest for late settlement.
• Payments made under a payment notice instruction are treated as authorised payments by the pension scheme and will not trigger unauthorised payment charges.
• PSAs can adjust beneficiaries’ entitlements to reflect the IHT paid. This should be done on a just and reasonable basis accounting for actuarial assumptions and any tax previously paid.
• Any pension scheme rule attempting to prohibit or restrict paying tax under this section is void.
• If HMRC later repays overpaid IHT, the payment may be made to the PRs or to any beneficiary the overpayment relates to — but never back to the scheme administrator.

PSAs may face challenges in meeting IHT settlement deadlines if pension assets are invested in illiquid holdings, such as property. This may require schemes to sell assets, such as commercial property, sometimes at below market rates to realise funds to cover the IHT charge within the required 35 days.

IHT and income tax considerations

The income tax treatment of pension death benefits remains unchanged. This means that from April 2027, pension benefits could face both IHT and income tax, including where the member dies after age 75 or where lump sums exceed the available allowances. In practice, income tax will usually apply only to the pension fund after IHT has been deducted. However, if the IHT is paid from outside the pension — such as from the free estate — the full pension benefit may be taxable when received.

Beneficiaries should not suffer income tax on funds used to pay inheritance tax where they ultimately bear the IHT liability. The new rules are designed to ensure that no additional income tax arises for beneficiaries, regardless of who physically settles the IHT.

Where the following conditions are met, a beneficiary may deduct from their taxable pension income (TPI), arising from a pension death benefit, the lower of:

• the inheritance tax they have borne (net of any amounts already claimed in earlier tax years); and
• the amount of TPI received from the death benefit.

Conditions to qualify for an income deduction

Beneficiaries may claim a reduction to their TPI in a tax year if all of the following conditions are met:

• There is an amount of TPI in a tax year
• The TPI reflects a death benefit from a pension scheme on the death of a scheme member
• The benefit is not an excluded benefit
• IHT has been paid in respect of the scheme’s notional pension property. This can happen where:
  1. The beneficiary pays the IHT attributable to the deceased’s notional pension property, or
  2. The PRs pay the IHT attributable to the deceased’s notional pension property and pass the burden on to the beneficiary – such as reducing the beneficiary’s entitlement from the free estate, or
  3. A beneficiary receives a taxable pension benefit, and a separate tax-free death benefit the beneficiary is entitled to is reduced by the IHT the scheme administrator has settled under a payment notice.
     
     
     For example:
     Joe dies aged 69 leaving a SIPP valued at £300k, and a dependant’s scheme pension of £25k per annum. The lump sum death benefit from the SIPP is within the LSDBA (settled free of income tax), but the PSA is instructed to settle IHT of £20k from that fund.
     
     As income tax free benefits were reduced the beneficiary gets a deduction from a separate source of TPI - the dependant scheme pension, which is always subject to income tax. Again, the deduction is limited to the lower of:

     1. IHT settled - £20k (less earlier years’ deductions)
     2. Amount of TPI linked to the death benefit - £25k

Note: this won’t allow a deduction from someone’s own pension income – annuity/drawdown or scheme pension, only a deduction from the taxable pension income they inherit following the death of another.

For example, Beth dies aged 70 with a pension fund of £200,000, IHT of £40,000 is due on the pension death benefit and is paid by Isaac (Beth’s only child and beneficiary) from the estate funds – reducing his entitlement. The pension death benefit of £200,000 is paid as a lump sum free of income tax as Beth died before age 75. There is no taxable pension income in relation to any death benefit to reduce by the IHT paid. The £40,000 IHT paid cannot be used to reduce Isaac’s other income tax exposure.

If IHT exceeds taxable pension income

If in a tax year a beneficiary has settled IHT that exceeds the TPI they receive from a death benefit then the excess is carried forward to future tax years to offset against future TPI. This could happen where a beneficiary draws the death benefits gradually under beneficiary drawdown or they purchased a beneficiary annuity – the IHT paid may not be offset for a number of tax years.

Special lump sum death benefit charge

Where a non‑qualifying person (such as certain trusts or estates) receives a lump sum death benefit that is subject to both the special lump sum death benefit charge and inheritance tax arising from notional pension property, the special charge can be reduced. If the recipient makes a claim to HMRC, the amount tested for the special lump sum death benefit charge is reduced to reflect the inheritance tax settled on that benefit. Where this results in an overpayment, HMRC must refund the excess tax directly to the non‑qualifying person.

Refunds of overpaid IHT

Where IHT is paid on a deceased member’s notional pension property and some or all of that IHT is later refunded to a pension beneficiary, the refund is treated as taxable pension income, not as a tax‑free repayment. This applies where the member died aged 75 or over, the recipient is a qualifying beneficiary (not a non-qualifying individual, such as a trust), and the IHT refund is paid either directly to the beneficiary or indirectly via the personal representatives. The amount is treated as pension income in the tax year the refund is paid, ensuring the beneficiary does not benefit from both an income‑tax deduction for paying IHT and a tax‑free refund later.

The amount taxed depends on who originally paid the IHT. If the scheme administrator paid the IHT, the full refunded amount is taxed as pension income. If the beneficiary or personal representatives paid the IHT, the taxable amount is capped at the lower of the refund received and the income‑tax deduction previously allowed for in that IHT payment. This approach aligns the income‑tax charge with the relief actually obtained.

LSDBA and IHT with multiple lump sums

When multiple lump sum death benefits are paid at the same time, the available LSDBA is normally shared between them in proportion to their size. This avoids ordering issues and prevents one payment using the allowance ahead of others.

Where inheritance tax (IHT) is attributable to notional pension property, the apportionment is instead based on an IHT‑adjusted amount, rather than the cash actually paid. The adjusted amount is calculated by:

1. Starting with what the beneficiary receives.
2. Adding back any IHT paid by the scheme on the beneficiary’s behalf.
3. Deducting only the IHT for which that beneficiary is personally liable.

IHT paid by someone else does not reduce a beneficiary’s LSDBA usage, and the adjusted amount cannot fall below nil. This ensures LSDBA usage reflects the true economic value of each benefit.

Charity lump sum death benefits

Lump sum death benefits (not excluded benefits) that pass to a charity will be valued as part of the estate but will qualify for exemption to IHT.

Where at least 10% of the taxable estate is left to charity the estate qualifies for a 36% IHT rate – instead of 40%. ​Notional pension property nominated to a charity counts toward the 10% of estate gifted to charity. When calculating if the 36% IHT rate applies PRs need to include the value of notional pension property.

Considerations:

• PRs may still need to leave 10% of the taxable estate to charity under the will, potentially resulting in more than 10% going to charity once pensions are included.
• Where 10% of a pension is nominated to charity, investment growth differences may mean less than 10% of total assets go to charity, losing the reduced IHT rate while increasing charitable gifts.
• Clients should review who benefits under the will versus the pension to ensure outcomes align with their intentions.

Pensions and Business Relief or Agricultural Relief

Certain pensions can hold commercial, business or agricultural property. Before 6 April 2027, pensions sit outside the IHT estate, so Business Relief (BR) and Agricultural Relief (AR) are irrelevant.

From 6 April 2027, pensions will be included in the estate, but pension assets will not qualify as relevant business or agricultural property. As a result, BR and AR will not apply, and pension assets will generally be subject to IHT at the full rate unless another exemption applies.

See our article on IHT exemptions and reliefs for more information.