Inheritance Tax on Pensions: What Are the Changes from April 2027?

How much Inheritance Tax is payable?

• The standard rate of Inheritance Tax is 40% on the taxable value of an estate above the available tax-free allowances.
• A reduced rate of 36% may apply where at least 10% of the relevant net estate is left to charity.

The standard tax-free allowance, known as the nil-rate band, is currently £325,000. An additional residence nil-rate band of up to £175,000 may be available where a qualifying home is passed to direct descendants. This can provide a combined allowance of up to £500,000 for an eligible individual. Unused allowances may also be transferable between spouses or civil partners, subject to the applicable rules.

What is changing for pensions?

From 6 April 2027, most unused pension funds and pension death benefits will be included when calculating the deceased’s estate for IHT purposes. This means pension wealth that may previously have passed to beneficiaries without an IHT charge could increase the taxable value of an estate.  Certain exclusions and exemptions will continue to apply, including qualifying death-in-service benefits and transfers to a surviving spouse or civil partner where the relevant exemption is available.  Personal representatives will generally be responsible for reporting and paying any IHT due on pension benefits brought within the new rules.

What should you do now?

The changes provide a timely reason to review your Will, pension arrangements and wider estate planning. The effect will depend on the value and composition of your estate, the available allowances and any applicable exemptions or reliefs.

This article provides general information only and is not intended as individual legal or tax advice.