UK IHT on Unused Pensions April 2027 Deep Dive Guide 2026/27

Major change announced Autumn Budget 30 October 2024: unused pension funds enter the IHT estate from 6 April 2027. Currently most pension wealth sits outside the estate for IHT purposes - benefits paid to nominated beneficiaries at trustees' discretion fall outside estate. From 6 April 2027: that exception is largely removed. Affected pensions: (a) Defined contribution (DC) pensions: SIPP, SSAS, workplace DC scheme, personal pension. Uncrystallised funds AND crystallised funds in flexi-access drawdown both within scope. (b) Death benefits payable under discretion: previously outside estate, now within unless paid to spouse/civil partner or charity. NOT affected (still IHT-free): (a) Defined benefit (DB) lump sum death benefits: typically scheme rules. (b) Dependants' pensions paid as income: ongoing pension to spouse / dependant excluded. (c) Death-in-service benefits from registered pension schemes: HMG confirmed exclusion. (d) Income drawdown payments after death taxed at recipient's marginal rate (existing regime) - that income tax treatment unchanged. Numeric impact: government estimates 213,000 estates per year include pension wealth + ~10,500 of those will incur IHT charge from 2027/28 onwards. Average additional IHT charge ~£34,000. Mechanism: pension scheme administrators report unused funds + death benefits to PRs. PRs add to estate. Tax calculation: standard 40% IHT on excess above NRB + RNRB. Layered tax for non-spouse beneficiaries: (1) IHT on pension wealth in estate at 40%. (2) Income tax when beneficiary draws pension at marginal rate (if member died age 75+). Combined effective rate could exceed 65%. Major planning implication.

2 key exemptions preserve IHT-free pension transfer: (1) Spouse / civil partner: pension funds passing to surviving spouse or civil partner = IHT exempt. Spousal exemption Section 18 IHTA 1984 extends to pension wealth. (2) Registered charity: pension nominated to UK-registered charity = IHT exempt. Charitable exemption Section 23 IHTA 1984. NOT exempt: (a) Adult children: even if cohabiting / dependent. (b) Cohabiting partner not formally married or civil-partnered. (c) Parents who outlive the member. (d) Siblings. (e) Friends / informal beneficiaries. (f) Trusts: pension trust nomination follows normal trust IHT rules + estate taxed first. Planning implication - married couples: nominate spouse as primary beneficiary. Pension passes IHT-free on first death + spouse maintains pension wealth. On second death, exemption no longer available - children's inheritance suffers IHT. Charity planning: charity nomination wipes IHT charge on that portion. 10% charity legacy: if 10%+ of net estate goes to charity, residual estate IHT rate reduces from 40% to 36% (Section 8C IHTA 1984). Pension portion can count towards 10% calculation. Worked example - £600k unused pension, member dies single age 70: Option A - all to son: £600k enters estate. NRB + RNRB £500k tax-free, £100k at 40% IHT = £40k. Son receives £560k. Option B - £60k to charity + £540k to son: charity portion IHT-free. £540k son portion + estate. NRB + RNRB shelters £500k. £40k taxable at 36% (10% charity reduction triggered) = £14.4k. Son receives £525.6k. Charity receives £60k. Family + charity combined wealth £585.6k vs £560k. £25.6k uplift via charity nomination. Civil partnership advantage: same-sex + opposite-sex couples in civil partnership get full spousal exemption. Not married but civil partnered counts.

Personal Representatives (executors / administrators) responsible for reporting + paying IHT on pension wealth from April 2027. New reporting flow: Step 1 - PR appointed via Grant of Probate (will exists) or Letters of Administration (intestate). Step 2 - PR identifies pensions: review deceased's records, pension scheme correspondence, contact known providers. Step 3 - PR requests pension valuation: each scheme administrator provides value at date of death + nominated beneficiaries. Step 4 - PR includes in IHT400: pension wealth declared on IHT account. New schedule expected (IHT400 supplementary form). Step 5 - IHT calculated on combined estate including pension. Step 6 - PR pays IHT: due 6 months after end of month of death (Section 226 IHTA 1984). Step 7 - Pension scheme pays beneficiary AFTER PR provides clearance. Funding the IHT bill: pension funds frozen until IHT paid. PR must fund IHT from: (a) Other estate liquid assets; (b) Beneficiary loan back to PR; (c) Bank borrowing with executor's loan facility; (d) Direct payment scheme: pension administrator pays IHT directly to HMRC from pension on PR instruction (expected mechanism still being finalised). Pension administrator role: provides valuation + information + may pay direct to HMRC. NOT responsible for IHT liability itself - that sits with estate. Multi-pension complexity: deceased with 5 pensions = 5 separate administrators. PR coordinates valuations + apportions any IHT charge. Timeline pressure: 6-month IHT deadline tight when pension administrators slow to value. Industry preparing for streamlined process - early evidence suggests 2-3 month valuation turnaround typical. Penalties for non-disclosure: PR personally liable for IHT shortfall + interest from due date. Section 226 + Sch 25 FA 2008. Up to 100% of tax + interest. Professional advice essential: estates with significant pension wealth (£200k+) post-April 2027 likely benefit from solicitor + IFA coordination.

HMG confirmed death-in-service (DIS) benefits paid from registered pension schemes EXCLUDED from IHT. Late 2024 / 2025 consultation response. What this means: most employer-provided life cover paid via the pension scheme remains IHT-free under the new April 2027 regime. Mechanism: (a) Employer-funded DIS: typically 2-4x salary, paid as lump sum on death in service. (b) Trust arrangement: scheme trustees hold discretion to pay nominated beneficiary. (c) Outside estate: preserved exclusion. Exclusion conditions: (1) Paid from registered pension scheme - DIS run via group personal pension or master trust qualifies. (2) Lump sum at death-in-service - not return of pension contributions, separate cover. (3) Discretionary nomination: trustees exercise discretion - not contractually obliged to specific beneficiary. What's NOT excluded: (a) Personal life insurance policies NOT in trust: standard estate treatment. Most insurance policies SHOULD be written in trust to avoid this. (b) Death-in-retirement benefits: lump sum payable if member dies after retirement but before age 75 - these are pension death benefits now in scope of IHT from April 2027 (subject to spouse / charity exemption). (c) Some company-paid life cover outside registered scheme: P11D benefit treatment + estate treatment apply. Worked example - 40-year-old employee with £200k DIS cover dies: Cover paid via group pension scheme DIS: IHT-exempt. Goes to spouse / nominated beneficiary tax-free. Combined with pension fund £80k: pension fund part of new regime - in estate from April 2027 unless to spouse / charity. If to spouse: both DIS £200k + pension £80k = £280k IHT-free. If to adult child: DIS £200k IHT-free, pension £80k in estate (potentially IHT-charged). Strategic check: review DIS nomination forms. Default often spouse but life events (divorce, remarriage, separation) require updates. Trustees follow latest valid nomination. Personal life policies: ensure written in trust for IHT efficiency.

Early drawdown to reduce IHT exposure - complex calculation. Pre-April 2027 strategy: some advisers suggest faster drawdown so funds gifted (7-year IHT taper) or spent before April 2027. Income tax cost vs IHT save: Early drawdown: pension income taxed at marginal rate. Higher rate taxpayer: 40% IT on each £1 drawn (after 25% PCLS). If kept in pension + dies pre-April 2027: passed to non-spouse beneficiary IHT-free (current regime). If kept in pension + dies post-April 2027: 40% IHT in estate. Combined with beneficiary's income tax 40% on draws (if member age 75+ at death) = ~64% effective rate. Worked example - 65-year-old with £500k SIPP, healthy, life expectancy 85+: Option A - leave in pension, die at 85, son inherits: 2026 to 2027 transitional - 1 year of old regime: probably out of scope unless die in window. Post-April 2027 to death age 85 (~18 years): assume 5% growth, £500k → £1.2m. Estate IHT 40% = £480k. Son's income tax on remaining £720k drawdown 40% = £288k. Net to son: £432k. Option B - drawdown £40k/year, age 65 to 85, after PCLS: 20 years × £40k = £800k drawn. Marginal rate 40% on most = £320k IT. Net to retiree's wealth £480k. Spend or save in ISA + GIA outside pension. If saved: gradual gifting (7-year rule): regular gifts from income exemption (Section 21 IHTA 1984) takes much out of estate. Lump sum gifts: 7-year PET. Complex outcome depending on growth, expenditure, gifting. Decision factors: (1) Health + life expectancy: short life expectancy = keep in pension. (2) Spouse status: spouse exemption preserves pension. Married couples less affected. (3) Estate NRB headroom: estate already over NRB - pension worsens; under NRB - irrelevant. (4) Retirement income need: need to draw anyway? (5) Charity intent: any charitable bequest? (6) Other assets: ISA + GIA + property mix affects optimal sequence. Specialist advice essential: this is the headline planning question of 2026-2027 for high pension wealth retirees.

Compare 3 main strategies: Strategy 1 - Pension preservation: maintain pension wealth, accept potential IHT exposure for non-spouse beneficiaries from April 2027. Best when: spouse beneficiary, charitable intent, member shortlife expectancy, post-Trump market growth expectations. Strategy 2 - Lifetime gifting + 7-year PET: drawdown pension, gift cash to children. 7 years survival removes from estate (Section 3A IHTA 1984). Gift between £325k single / £650k couple uses up NRB but anything beyond 7 years out-of-scope. Strategy 3 - Regular gifts from income: Section 21 IHTA 1984. Habitual regular gifts from surplus income exempt from IHT immediately - no 7-year wait. Must be: (a) Out of income (not capital). (b) Habitual / regular pattern. (c) Leave donor with sufficient income for normal standard of living. Pension income post-PCLS counts as income for this purpose. Worked example - retired couple £1m DC pension, £100k savings, want to maximise grandchildren inheritance: Strategy mix: (a) Drawdown £40k/year per spouse (£80k household). Use £30k for lifestyle, £50k habitual gifts to children/grandchildren from surplus income. (b) Over 15 years: £750k transferred IHT-free via gifts-from-income exemption + £450k post-tax income for lifestyle. (c) Reduce pension to ~£300k: still meaningful retirement security + lower IHT exposure. (d) Charity legacy 10%: trigger 36% rate on remaining estate. Tax efficiency: gifts-from-income avoid IHT entirely. PETs survive 7 years to escape. Pension passes spouse IHT-free first; second death exposure reduced. Documentation crucial: HMRC requires evidence regular gifts-from-income pattern at probate. (1) Annual gift schedule. (2) Income vs expenditure record showing surplus. (3) Pattern of at least 3-5 years for credibility. (4) Maintained standard of living. Specialist solicitor + IFA: complex strategies need professional drafting of will + LPA + gift records. Estate planning urgency: April 2027 deadline triggers significant 2026 planning activity.

Annuities have different treatment under April 2027 changes. Single-life annuity: dies with member. No residual value. No IHT exposure. Joint-life annuity: continues to spouse / partner survivor. (a) Spouse continuation: spousal exemption preserved. (b) Non-spouse joint-life: ongoing payments to nominee - included in member's "value" at death? Treasury consultation indicates joint-life continuation payments to non-spouse may fall into estate under new regime. Specific drafting awaited in Finance Bill. Guarantee periods: e.g., 10-year guarantee on annuity. If annuitant dies year 3, remaining 7 years' payments continue to nominated beneficiary. (a) Annual payments treated as estate asset: capitalised value at death enters IHT calculation. (b) Spouse beneficiary: exempt. (c) Non-spouse beneficiary: in scope from April 2027. Defined Benefit (DB) pensions: (a) Member's pension dies with them: no residual value. (b) Surviving spouse / dependant pension: continues - spouse exemption. (c) DB lump sum death benefit: typically scheme rules - HMG confirmed continued exclusion from IHT for "registered pension scheme death benefit" payable from DB schemes. (d) DB transfer-out before death: if member transferred DB to DC pre-April 2027, then dies post-April 2027: full DC IHT regime applies to transferred fund. Annuity purchase strategy post-April 2027: (a) Annuity from DC fund: extracts pension wealth from IHT-exposed DC + locks in single / joint income. Single-life: no IHT issue. Joint to spouse: exempt. (b) Single-life with no guarantee: maximum income + zero residual IHT exposure. Best for sole survivor / no dependants. (c) Income drawdown vs annuity tradeoff: pre-2027 favoured drawdown for flexibility + inheritance. Post-2027 may shift toward annuity for IHT efficiency. Specialist annuity broker: market quotes change weekly. June 2026: ~6.5% single-life rates age 65. Strategic implication: annuity purchase becomes more attractive for high pension wealth + non-spouse beneficiaries seeking IHT optimisation.

Discretionary trust nomination on pension: complex post-April 2027. Current (pre-April 2027) regime: many members nominated discretionary trust as primary beneficiary. Trustees hold scheme value + distribute to children / grandchildren as needed. IHT-efficient because trust + pension both outside estate. Post-April 2027 changes: discretionary trust no longer carries automatic exemption. Pension funds passing to discretionary trust = within estate IHT charge if no spouse / charity exemption applies. Spousal bypass trust (SBT): historical structure where spouse received pension via discretionary trust naming spouse + children as beneficiaries. (a) Pre-April 2027: avoided spousal estate building up + IHT-efficient onward transfer. (b) Post-April 2027: SBT loses IHT advantage - pension funds entering trust pass through estate first (IHT charge if no exemption used). Trustees beware: existing nominations to trusts being reviewed industry-wide. Many advisers redirecting nomination to spouse + then onward gifting / planning. Reverter to settlor trusts: niche structure - rarely used in pension context. Charity remainder trust: pension to charity remainder trust = charitable exemption applies on settlement. Income to beneficiary for life, then to charity. Complex but IHT-efficient. What still works: (1) Direct spouse / civil partner nomination: full exemption. (2) Charity nomination: full exemption. (3) Death-in-service via DIS scheme: continues exempt. (4) DB scheme lump sum: continues exempt. What needs reconsidering: (1) Discretionary trust nominations: review by 5 April 2027. (2) Spousal bypass trusts: legal advice on alternatives. (3) Multi-generational nominations: e.g., spouse first then children - intermediate IHT charges may now apply. (4) Adult-child only nominations: IHT charge expected on second-death pension passes. Professional review urgent: 6-12 month lead time for nomination updates + will revisions + LPA reviews. Estate planning solicitor + IFA + pension provider coordination needed.

Same IHT rates + nil-rate band apply to pensions as to other estate assets: Standard rate: 40% above NRB on death. Reduced rate: 36% if 10% of net estate to charity. NRB: £325,000 (frozen until April 2030 per Autumn Budget 2024). RNRB (Residence Nil Rate Band): £175,000 if main residence passes to direct descendants. Combined for couple: £325k + £175k = £500k per person, transferred to surviving spouse = £1m total for couple. RNRB taper: reduces £1 for every £2 estate value above £2m. Lost entirely at £2.35m. Pension entering RNRB calculation: increases estate value. Could trigger / worsen RNRB taper for already-large estates. Worked example - couple, second death, £1m DC pension + £800k property + £500k other assets = £2.3m total estate: Pre-April 2027: £1m pension outside estate. £1.3m estate. NRB + RNRB available £1m. £300k taxable at 40% = £120k IHT. Post-April 2027: £1m pension in estate. £2.3m estate. RNRB taper: estate above £2m by £300k → RNRB tapered by £150k. Available NRB £325k + RNRB £25k = £350k tax-free. £1.95m taxable at 40% = £780k IHT. Increase: £660k IHT due to pension inclusion. Strategic implications: (1) Larger estates lose RNRB entirely due to pension inclusion. (2) Mid-sized estates push above £2m trigger taper for first time. (3) £1m couple's allowance no longer covers typical "comfortable retirement" estate. (4) £325k NRB freeze to April 2030: real-terms erosion continues. Business Relief / Agricultural Relief unaffected: pension is investment wealth, not qualifying for BPR/APR. Pension cannot use 7-year taper: drawdown + gift uses standard 7-year rule on cash gifted. Long-term outlook: industry expectations of further pension IHT reforms continue. April 2027 likely first step rather than final position. Monitor Autumn Budgets 2026 + 2027 for further changes.

Lifetime Allowance (LTA) abolished from 6 April 2024. Replaced by 3 new allowances - Lump Sum Allowance £268,275 (LSA), Lump Sum + Death Benefit Allowance £1,073,100 (LSDBA), Overseas Transfer Allowance £1,073,100 (OTA). Section 637A-637SE ITEPA 2003 + Schedule 9 FA 2023. Interaction with IHT change April 2027: LSDBA: governs tax-free death benefit lump sums during member's lifetime + after death. £1,073,100 cumulative limit (or higher with protections). Exceeding LSDBA on death = excess taxed at recipient's marginal rate (existing post-LTA-abolition regime). From April 2027 ALSO IHT: pension funds enter estate. Double exposure: large pension fund passed to non-spouse - (a) IHT on death at estate level. (b) Income tax when beneficiary draws down post-75 OR income tax at recipient marginal rate on lump sum above LSDBA. Combined effective rate calculation - £2m pension fund, age 80 member, non-spouse beneficiary: Estate IHT: assume NRB used elsewhere, 40% × £2m = £800k. Net post-IHT: £1.2m to beneficiary. Lump sum vs drawdown choice: Option A - Lump sum: £1.073m at 0% IT (within LSDBA portion), £127k at 40% IT (higher rate beneficiary) = £50.8k IT. Net £1,149,200. Effective tax rate: (800 + 50.8) / 2000 = 42.5%. Option B - Drawdown: £1.2m via drawdown over 10 years at 40% marginal each year = £480k IT. Net £720k. Effective rate: (800 + 480) / 2000 = 64%. LSDBA strategic value: lump sum option uses LSDBA first - more efficient than drawdown for large funds. Pre-2024 LTA protections preserved: Enhanced Protection, Fixed Protection 2012/2014/2016, Individual Protection 2014/2016 grant higher LSA + LSDBA. Specialist review essential to ascertain protection status. Transitional 2024-2027 sweet spot: members dying 2024-2027 benefit from LTA abolition lump sum efficiency PLUS pre-April 2027 IHT exemption. Notable planning era. Specialist tax + financial planning: high pension wealth coordination critical given multiple overlapping regimes.

2026 preparation checklist for IHT-on-pensions April 2027: (1) Calculate exposed pension wealth: total DC pension funds + any death benefit lump sum entitlements. Exclude DB pension income + DIS cover. (2) Calculate IHT exposure: combine with rest of estate. If above NRB + RNRB (£500k single / £1m couple) + RNRB taper threshold £2m: significant IHT exposure. (3) Review beneficiary nominations: every pension scheme has a nomination form. (a) Spouse / civil partner for IHT-free transfer. (b) Charity portion for IHT efficiency + 10% rate reduction. (c) Avoid discretionary trust nominations unless specific advice. (d) Update after major life events: marriage, divorce, death, birth. (4) Consider drawdown acceleration: if expecting non-spouse inheritance, draw + gift / spend may reduce IHT. Weigh IT cost vs IHT save. (5) Maximise gifts-from-income: regular pattern of gifts from surplus income exempt under Section 21 IHTA 1984. Establish 2026 baseline. (6) Use 7-year PET: large gifts now start the 7-year clock for IHT taper. Survive to 2033 + gifts fully out of estate. (7) Charity legacy review: pension nomination to charity + will charity bequest. 10% of net estate triggers 36% rate. (8) Specialist estate planning solicitor: will review, IHT planning, asset protection trusts where appropriate. (9) IFA / pension specialist review: pension structure, drawdown strategy, annuity options, LSDBA optimisation. (10) Annuity quote comparison: post-April 2027 may favour annuitisation for IHT efficiency. (11) LPA in place: Lasting Power of Attorney for pension decisions if mental capacity loss. (12) Communicate plans: discuss with beneficiaries to align expectations. (13) Re-review every 2 years: regime + family circumstances change. (14) Documentation: gift records, charity intent records, nominations - keep dated + accessible. (15) Watch Finance Bill 2025/26 implementing legislation: detailed mechanics still finalising. June 2026 status: Royal Assent expected late 2026 with commencement 6 April 2027. Average advice cost £1,500-£5,000 one-off: solicitor + IFA review for £500k+ pension wealth typically pays back within 2-3 years via tax savings.

Implementation legislation in Finance Bill 2025/26. Current status June 2026: technical consultation completed February 2025, response published autumn 2025, draft legislation published Finance Bill 2025/26 (Budget 2025 announcement). Royal Assent expected late 2026, commencement 6 April 2027. Possible legislative changes between June 2026 and April 2027: (1) Spouse exemption details: confirmed in principle, exact mechanism in legislation. (2) Death-in-service treatment: HMG confirmed exclusion - legislative drafting clarifies which schemes qualify. (3) DB lump sum death benefit treatment: similar to DIS exclusion expected. (4) Discretionary trust nomination treatment: technical detail on whether trust counts as exempt beneficiary in any circumstances. (5) Joint-life annuity continuation: capitalisation method for annuity value. (6) International pension treatment: QROPS, overseas pension funds treatment - cross-border IHT issues. (7) Reporting mechanics: PR + pension administrator information flow, direct payment to HMRC mechanism. Political risk - General Election: government changes could delay or modify regime. May 2024 election produced current Labour government with majority - 5-year mandate to ~May 2029. April 2027 commencement protected by political timetable. Conservative opposition stance: has signalled willingness to reverse pension IHT change if returned to government, but realistically that means post-2029 reversal even if elected. Industry lobby: AAT, ICAEW, AB I, ABI making representations on technical details. Has not opposed core principle but advocating for clearer rules + reasonable transitional provisions. Strategic implication: plan on April 2027 commencement going ahead as announced. Don't rely on political reversal. If reform delayed by 1 year (April 2028), planning benefits taxpayers anyway. If brought forward (unlikely) early-2027 commencement, current planning still relevant. Stay informed: HMRC pension tax bulletin, professional body updates (CIOT, STEP, AAT), Treasury announcements. Avoid premature action: don't crystallise pension or make irreversible gifts before legislation finalised. Use 2026 for analysis + 2027 H1 for implementation when rules clear.