New Draft Rules Mean Pensions Could Face Inheritance Tax from 2027 – Here’s What You Need to Know

Published on 5 August 2025 at 16:06

Big changes are coming to the way pensions are treated when someone dies. The draft Finance Bill 2025 proposes that, from 6 April 2027, some pension funds will be included in a person’s estate for inheritance tax (IHT).

Here’s how it works – and what it means for you.

What’s Changing?

Until now, most unused pensions weren’t counted as part of your estate for IHT, meaning they could often pass tax-free to your beneficiaries.

Under the new rules, certain pension death benefits will be treated as if you owned them immediately before you died, bringing them into your estate for IHT.

This means your loved ones could face a 40% IHT bill on part of your pension if your estate exceeds the current IHT threshold.

Which Pensions Are Affected?

These changes apply to:

UK registered pension schemes
Qualifying overseas pension schemes
Section 615(3) schemes (for some overseas employments)

They cover pension death benefits like lump sums, continuing payments, and other post-death payouts.

What’s NOT affected?

Death-in-service benefits (if you die while actively employed).
Dependants’ scheme pensions (e.g., pensions payable to a spouse or child based on dependency).

Who Pays the Tax?

Here’s where it gets interesting:

Normally, executors (personal representatives) pay the IHT.
But beneficiaries can now ask the pension scheme administrator to pay the IHT directly out of the pension before receiving their share.

If the IHT bill is £4,000 or more, the scheme must pay it directly if requested. For smaller amounts, it’s optional.

What If There’s Income Tax Too?

Some pension payouts are taxable as income. The new rules give beneficiaries a deduction for any IHT paid – so you won’t be hit twice on the same money.

If too much IHT gets paid and later refunded, the refund will be treated as pension income in the year it’s received.

When Do These Rules Kick In?

These changes will apply to deaths occurring on or after 6 April 2027.

What Should You Do Now?

Review your estate plan: If your pension is a big part of your wealth, consider its future IHT implications.
Talk to your pension provider: Check if your scheme will allow IHT to be paid directly.
Get professional advice: Estate planning is more complex under these new rules – a financial adviser can help you minimise the impact.