Historically, pension pots have been one of the few assets that could pass to beneficiaries free of Inheritance Tax (IHT). That is set to change from 6 April 2027. The UK Government has confirmed that most unused pension funds and death benefits will be treated as part of a deceased person’s estate and therefore potentially subject to Inheritance Tax at 40% above the available nil-rate bands. 

This change was announced in the Autumn Budget 2024, detailed in draft legislation in 2025, and is expected to be enacted in the Finance Bill 2025-26. 

What does this mean from 6 April 2027?

From 6 April 2027 most unused defined contribution pension pots including SIPPs, personal pensions, workplace pension pots and uncrystallised funds will be included in the value of an estate for IHT purposes. This applies regardless of whether you have started taking income from them. Any pension death benefits which are paid out on death will also be in the value of the estate for IHT purposes

Reporting and Payment of IHT

Under the new rules Executors will be responsible for reporting and paying the IHT due on the pension element of an estate. Executors will have to instruct pension providers to withhold funds and pay any IHT due before releasing sums due from pensions to beneficiaries.

Are there any exemptions?

Some pensions will remain protected or exempt, including transfers between spouses and civil partners. Some ongoing pensions (e.g. schemes that pay a continuing pension to a surviving spouse or dependent) are not treated as part of the estate because they won’t have a capital value. The government has confirmed that death-in-service benefits payable from a registered pension scheme will be excluded from the estate for IHT purposes provided they meet certain conditions. 

If you have already taken all your pension (i.e you’ve started drawdown or bought an annuity) then there’s nothing unused to include in your estate

Act Now

Building up large pension pots were seen as an efficient IHT planning tool but that will no longer be the case after April 2027. Bringing the value of significant pension pots in to estates for IHT means more estates will exceed the nil-rate bands and incur tax. If you are thinking about your own estate planning it is now more important than ever to review your arrangements and speak with one of our private client solicitors. We have offices in Dalry, Ayr and Girvan.

For more information, please contact Debbie Dunlop on 01292 281711 or debbie@mckinstry.co.uk