Families with significant pension savings may need to rethink their estate planning ahead of one of the biggest changes to the Inheritance Tax treatment of pensions in years.

From 6 April 2027, most unused pension funds and pension death benefits will be brought within a deceased person’s estate for Inheritance Tax purposes.

But there is another detail attracting attention.

Assets held inside a pension will not always receive the same Inheritance Tax reliefs that may be available where similar assets are owned personally.

In particular, HMRC has confirmed that loss on sale relief will not apply to pension assets.

This has led to the new system being described as creating a “two-tier” approach to Inheritance Tax.

So what is actually changing, who could be affected, and what should pension holders and their families be considering before April 2027?

What is changing to Inheritance Tax on pensions 2027?

Under the current rules, many discretionary pension schemes can normally pass unused pension funds to beneficiaries outside the deceased person’s estate for Inheritance Tax purposes.

That will change for deaths occurring on or after 6 April 2027.

Most unused pension funds and pension death benefits will be included when calculating the value of the deceased’s estate. The change has already been legislated through Finance Act 2026, which received Royal Assent on 18 March 2026.

This means a person who previously believed their pension sat outside their taxable estate could find that their estate becomes liable to Inheritance Tax once the pension is included.

HMRC estimates that in 2027/28 approximately 10,500 estates could become liable to Inheritance Tax that would not otherwise have been liable, while around 38,500 estates could pay more IHT. The estimated average increase in IHT among affected estates is approximately £34,000.

Does this mean every pension will face 40% Inheritance Tax?

No.

This is an important distinction.

The change does not mean HMRC will simply deduct 40% from every pension when somebody dies.

The pension will generally be brought into the wider estate calculation, and the normal Inheritance Tax exemptions, available nil-rate bands and other relevant rules must then be considered.

The standard IHT nil-rate band is currently £325,000, with a potential additional residence nil-rate band of up to £175,000 where the relevant conditions are satisfied. Transfers between spouses and civil partners can also qualify for exemption.

So the actual liability will depend on the whole estate rather than the pension in isolation.

Why is the new system being called “two-tier”?

One of the less obvious parts of HMRC’s new pension rules concerns what happens when an investment falls in value after somebody dies.

Under existing IHT rules, qualifying shares that form part of a deceased person’s estate may qualify for loss on sale relief.

For example, if qualifying listed shares are valued at £300,000 when somebody dies but are subsequently sold for significantly less within 12 months, it may be possible to make an IHT loss relief claim. Subject to the detailed conditions, the lower sale value can effectively replace the higher date-of-death value for the IHT calculation.

HMRC has confirmed that this relief will not apply to pension property.

Its reasoning is that the pension member is not treated as personally owning the individual investments held within their pension. The pension itself becomes “notional pension property” for IHT purposes, rather than the underlying shares, funds or property becoming assets of the deceased’s estate.

That creates a potentially significant difference.

Consider this example

Suppose someone dies with a pension worth £500,000.

A large proportion of the pension is invested in shares.

During the administration of the estate, financial markets fall and those investments are eventually worth only £400,000.

If qualifying shares worth £500,000 had instead been owned personally by the deceased and were sold within the relevant period, loss on sale relief might be available, subject to the conditions.

But where those investments sit within the pension, HMRC has confirmed that pension property does not qualify for the relief.

The eventual IHT position can therefore be based on a pension value that is higher than the value ultimately available to beneficiaries.

That difference is at the heart of concerns about a potential “two-tier” system.

Other IHT reliefs pensions will not receive

Loss on sale relief is not the only restriction.

HMRC’s May 2026 technical note confirms that notional pension property will not itself qualify for Business Property Relief or Agricultural Property Relief, because the pension member is not regarded as owning the underlying assets personally.

HMRC has also confirmed that the facility allowing IHT on certain assets to be paid by instalments over ten years will not be available for pension property.

This could be especially relevant to pensions such as SIPPs or SSAS arrangements holding less liquid assets.

The tax position therefore needs to be considered separately from the investment or commercial merits of holding an asset inside a pension.

Could beneficiaries have to wait for their pension inheritance?

Potentially, yes.

The new legislation introduces a withholding mechanism intended to help personal representatives deal with the IHT liability.

Where the personal representative believes IHT may be payable, they can issue a notice requiring the pension scheme to restrict payments.

In practical terms, beneficiaries may initially be able to access only 50% of their pension entitlement, with the remainder being withheld while the tax position is established.

A withholding notice can remain effective for up to 15 months after the relevant period following the death, although it should be removed earlier where the IHT has been settled or it becomes clear that no tax is payable.

This does not mean HMRC is confiscating half of the pension.

The purpose is to prevent all the pension money being distributed before sufficient funds have been retained to meet a potential IHT bill.

For some families, however, it could mean that inherited pension money is not available as quickly as it would have been under the existing system.

Who will be responsible for paying the tax?

Another major change concerns responsibility.

From April 2027, the deceased’s personal representatives, normally the executors or administrators of the estate, will generally be responsible for reporting and paying the IHT attributable to pension property.

Once pension benefits become vested in a beneficiary, the beneficiary can also become jointly and severally liable for the IHT attributable to their pension benefits.

That means executors will need a much clearer picture of the deceased person’s pension arrangements.

They may need to identify several different pension schemes, obtain valuations, establish which beneficiaries are exempt and calculate the pension’s effect on the overall estate.

IHT normally becomes payable by the end of the sixth month following the death, after which interest can begin to accrue.

Can the pension provider pay the IHT directly?

Yes.

A new Pensions Direct Payment Scheme will allow personal representatives or pension beneficiaries to instruct a registered pension scheme to pay pension-related IHT directly to HMRC.

Where a valid payment notice is issued, the pension provider will generally have 35 days to make the specified payment.

The tax paid is then deducted from the pension benefits that would otherwise have been paid to the beneficiary.

This could help where there is insufficient cash elsewhere in the estate to settle the IHT bill.

What happens if the pension holder dies before age 75?

The age-75 rules remain important.

HMRC’s technical note explains that where somebody dies before 75, qualifying pension income and certain lump-sum death benefits can generally remain Income Tax-free, subject to the relevant pension rules and allowances.

Where someone dies aged 75 or over, inherited pension benefits are generally taxable when received by the beneficiary.

This creates an important interaction between IHT and Income Tax.

However, HMRC has introduced provisions designed to prevent Income Tax being charged on the part of the pension effectively used to meet the IHT liability.

Where IHT is paid directly from the pension, for example, Income Tax should apply to the pension benefits after the amount used to settle IHT has been deducted.

Could the effective tax still be very high?

Yes, particularly where the pension holder dies aged 75 or over and the beneficiary is already a higher-rate taxpayer.

For illustration, if £100 of pension wealth is fully exposed to 40% IHT, £60 remains.

If a higher-rate taxpayer subsequently pays 40% Income Tax on that £60, another £24 is lost.

The beneficiary receives £36.

That represents an overall effective tax burden of 64% on that portion of the original pension.

This will not apply to every pension or every beneficiary, but it demonstrates why retirement and estate planning should increasingly be considered together.

What remains exempt from the new pension IHT rules?

There are important exceptions.

The existing IHT exemption for pension benefits passing to a surviving spouse or civil partner will continue.

Qualifying benefits passing to charities can also remain exempt.

HMRC has additionally confirmed that death-in-service benefits payable from registered pension schemes will remain outside the scope of the new IHT charge, while certain dependant’s scheme pensions are also excluded.

So families should not assume that every pension death benefit will automatically become taxable from April 2027.

Could pensions also affect the Residence Nil-Rate Band?

Potentially.

This could be one of the most significant indirect effects of the change.

The residence nil-rate band can provide an additional IHT allowance where a qualifying residence passes to direct descendants.

However, the allowance begins to taper where an estate exceeds £2 million.

Once unused pension wealth is included within the estate from April 2027, some estates that previously sat below £2 million could move above it.

That could reduce the available residence nil-rate band as well as increasing the amount of the estate potentially exposed to IHT.

The pension could therefore affect the estate’s tax position in more than one way.

Should people start withdrawing their pensions before April 2027?

Not automatically.

Changing pension withdrawals purely because of the IHT reforms could create different tax consequences and potentially damage a person’s long-term retirement position.

Pensions remain primarily designed to fund retirement.

Whether it is sensible to draw more from a pension, make lifetime gifts, retain investments, change beneficiary nominations or restructure other assets will depend on the individual’s circumstances.

For some families, the solution may have very little to do with withdrawing the pension at all.

The more sensible starting point is usually to understand the numbers.

A Pension and Inheritance Tax Review Before April 2027

People with significant pension wealth should consider reviewing the following before the rules take effect:

• the current value of all pension arrangements;
• their estimated total estate including property, savings, investments and business assets;
• current pension beneficiary or expression-of-wish nominations;
• whether spouse, civil partner or charity exemptions are relevant;
• whether including the pension could push the estate above the £2 million residence nil-rate band taper threshold;
• how the estate would fund any future IHT liability;
• whether wills and pension nominations still produce the intended outcome;
• how pension withdrawals fit into wider retirement and estate planning.

The purpose of the exercise should not simply be to reduce tax.

It should be to make sure that your pension, retirement income, will, estate and intended beneficiaries all work together under the rules that will apply from April 2027.

Final Thoughts

The pension IHT reforms represent a fundamental shift in the way many families will need to approach estate planning.

Most unused pensions will no longer sit automatically outside the IHT calculation.

At the same time, pension property will not receive some of the reliefs available to assets held directly in an estate, including loss on sale relief.

Executors may also have additional reporting responsibilities, beneficiaries could face delays accessing part of an inherited pension, and the interaction between IHT and Income Tax will become increasingly important.

The changes apply to deaths on or after 6 April 2027, so there is still time to review existing arrangements.

But waiting until the rules take effect could leave fewer opportunities to plan effectively.

Need help reviewing your Inheritance Tax position?

If you have significant pension savings, property, investments or business assets, AccounTax Zone can help you understand how the April 2027 pension changes could affect your estate.

We can review your current tax position, model the potential Inheritance Tax exposure and work alongside your financial adviser and solicitor where wider pension, investment or estate planning advice is required.

Book a FREE 30-minute initial consultation with AccounTax Zone to discuss your circumstances.

This article provides general tax information only and should not be treated as personalised tax, investment, pension or legal advice. The appropriate strategy depends on individual circumstances and the legislation and HMRC guidance in force at the relevant time.