Question 1

What changes for pensions and inheritance tax on 6 April 2027?

Accepted Answer

For deaths on or after 6 April 2027, most unused pension funds and pension death benefits count as part of the estate for inheritance tax. Section 150A of the Inheritance Tax Act 1984, inserted by the Finance Act 2026, treats a member of a registered pension scheme (or of a qualifying non-UK or section 615(3) scheme) as beneficially entitled, immediately before death, to what it calls notional pension property. Above the nil rate bands that can mean tax at 40%. Pensions left to a spouse or civil partner are usually exempt, subject to the conditions of the spouse exemption, and some benefits are excluded altogether.

Question 2

Why were most pensions outside inheritance tax before April 2027?

Accepted Answer

Because most pension schemes pay death benefits at the discretion of the scheme's trustees or provider. Until they decide, nobody is entitled to the money, so in most cases it was not part of anyone's estate. It already counted where it was payable to the estate as of right, or where the member could make a binding nomination or otherwise had a general power over it. From 6 April 2027 trustee discretion no longer decides whether a pension is in scope, although it still matters for who receives it and when.

Question 3

What is notional pension property?

Accepted Answer

It is the Act's name for the pension value that section 150A treats the member as owning, immediately before death, for inheritance tax. For a money purchase pension it is broadly the fund that may or must be used to provide benefits on death; for a defined benefit scheme it is the lump sum death benefits and guaranteed continuing payments; excluded benefits are taken off. In Steve's analysis the word notional carries the whole change: the member is treated as owning the pension for the charge, yet HMRC's technical note says the member is not treated as owning the pension's assets when it rules out business property relief, agricultural property relief, loss on sale relief and payment by instalments.

Question 4

Does it apply if someone dies before 6 April 2027?

Accepted Answer

No. The change applies to deaths on or after 6 April 2027. If the member dies before that date, the current rules apply, even if the benefits are paid to the beneficiaries after it.

Question 5

Which pensions are caught?

Accepted Answer

Unused money in personal pensions, SIPPs and money purchase workplace schemes, including drawdown funds, and lump sum death benefits and guaranteed continuing payments from defined benefit schemes. Qualifying non-UK pension schemes and section 615(3) schemes are caught too. For money purchase pensions the count also includes amounts not held in the member's own pot where they can reasonably be expected to be used to pay death benefits, such as cash balance benefits or an expected augmentation.

Question 6

Which pension benefits are excluded?

Accepted Answer

Four kinds, listed in section 150A(6): a dependants' scheme pension, from any type of arrangement; a trivial commutation lump sum that replaces a dependants' scheme pension; a dependants' or nominees' annuity bought together with the member's own lifetime annuity; and death in service benefits, meaning benefits payable only because the member was in employment or other work immediately before death. The test is what the scheme allows, not only what is chosen after the death: a benefit is excluded only where it may only be paid in one of those forms. HMRC's August 2026 note says that if a dependant could have used the fund to buy a dependants' annuity but chooses a dependants' scheme pension, that pension is not excluded. Other benefits payable on death are counted, valued as section 150A sets out.

Question 7

Are annuity guarantee periods and value protection included?

Accepted Answer

Yes. Where payments carry on to someone else after death under a guarantee period, they are brought into scope, and value protection, which returns unused capital as a lump sum death benefit, is not an excluded benefit either. A single life annuity with neither has no death benefit, so there is nothing left in it to count when the annuitant dies. HMRC's August 2026 note gives the example of an annuity that ceased on death, valued at nil.

Question 8

Are death in service benefits included?

Accepted Answer

Not if they qualify for the exclusion. It covers benefits payable because the member was employed, or in other work of a particular description, immediately before death, and that would not be payable otherwise. A refund of contributions that would have been paid anyway is not covered. Lump sums from the scheme of a previous job, where the member was a deferred member, normally are not covered either, although someone who left under a redundancy package may still count as employed under its terms or the scheme rules. Employers and schemes decide whether people on career breaks or long-term sickness absence count as in employment.

Question 9

Is a pension left to a husband, wife or civil partner taxed?

Accepted Answer

Usually there is no inheritance tax, subject to the spouse-exemption conditions. Benefits that go to a spouse or civil partner are exempt under section 18. The main exception: where the person who died was a long-term UK resident and their spouse or civil partner is not, the exemption is capped at the nil rate band limit, less any amount already used. Unmarried partners are not covered. The exemption defers the tax rather than removing it: if the survivor still holds the money when they die on or after 6 April 2027, it can count in their estate then, and unless they have remarried there is no spouse exemption to use. It is an inheritance tax exemption only, and does not make the pension income free of income tax.

Question 10

Does an inherited pension count in the estate of the person who inherited it?

Accepted Answer

Yes, remaining inherited drawdown can count on the beneficiary's death on or after 6 April 2027. HMRC's August 2026 technical note expressly illustrates money inherited before April 2027 being included when the beneficiary later dies. In its example a mother dies in July 2026, her son puts his share into beneficiary drawdown, and when he dies in November 2030 what is left in that account counts as his notional pension property, alongside his own pensions. The site's worked example rests on the same point: Mrs Miggins inherits her husband's pension before April 2027 and dies in 2029 with it still in drawdown. Money already paid out of the scheme to the beneficiary is part of their ordinary estate instead.

Question 11

Who is responsible for paying the inheritance tax on a pension?

Accepted Answer

The personal representatives. They report the pension and are liable for the tax on it. Once the pension is vested in a beneficiary, meaning the trustees have decided who receives it (or, in a non-discretionary scheme, the beneficiary is identified under the scheme rules), that beneficiary becomes jointly and severally liable with them for the tax attributable to it. The pension scheme administrator is not normally liable, unless it fails to act on a valid withholding notice or payment notice.

Question 12

When must the tax be paid?

Accepted Answer

By the end of the sixth month after the month of death, as for the rest of the estate. Interest runs on anything unpaid after that. The ten-year instalment option is not available for pension funds.

Question 13

Does the tax on the pension have to be paid before probate?

Accepted Answer

Normally, yes. HMRC's note says personal representatives must pay the inheritance tax due at that stage, including on pensions, and submit an account before they can apply for probate. In some cases HMRC will agree to postpone payment of some of the tax, with interest still running. The pension's share can be paid by the scheme under a payment notice, which can be used before probate is granted.

Question 14

Can the pension scheme pay the tax straight to HMRC?

Accepted Answer

Yes, on a valid request. Under the Pensions Direct Payment Scheme, the personal representatives, or a beneficiary (including the trustees of a trust that benefits), can give the scheme administrator a payment notice for the tax they are liable for on the pension. The scheme must pay HMRC within 35 days of receiving a valid notice. The notice must be for at least £1,000, cannot exceed the tax and interest the person giving it is liable for on the pension in that scheme, and cannot exceed the benefits still unpaid, after deducting anything already paid out or already covered by an earlier payment notice. It is optional, a prospective personal representative cannot give one, and money already used to secure an annuity counts as paid out, so it is not available.

Question 15

Can the personal representatives hold back the pension until the tax is paid?

Accepted Answer

Partly. A personal representative, or a prospective one, meaning someone with reason to believe they will become a personal representative, who knows or has reason to believe they may be liable for inheritance tax on the pension can give a withholding notice. While it has effect, the scheme cannot pay a beneficiary more than half of their entitlement, counting anything already paid. It lasts until the tax and interest are paid, the notice is withdrawn, or 15 months after the end of the month of death, whichever comes first. It does not change when the tax is due, and it does not apply to excluded benefits or to exempt beneficiaries such as a spouse.

Question 16

Does the pension pay the inheritance tax it causes?

Accepted Answer

Not necessarily. The tax on an estate is shared across the parts that bear it, in proportion to their values, so the pension bears its proportionate share of the whole bill. That share is a different calculation from the extra tax that adding the pension caused, and the two need not match. A payment notice is limited to the tax on the pension. In the site's worked example the pension's share is £140,000 of a £300,000 increase in the estate's tax, so £160,000 falls on the rest of the estate.

Question 17

How do personal representatives find the pensions and their values?

Accepted Answer

They should take reasonable steps to identify every scheme, then ask each one for the basic information. Regulations made on 13 July 2026 (SI 2026/818) set the timetable from 6 April 2027. The value of the pension, or an estimate with an explanation of how it was reached, is due within 28 days of a valid request, and an estimate must be followed by the actual value within 14 days of it being known. Information dependent on deciding the beneficiaries is due by the later of the applicable 28-day deadline and the end of the 14-day period beginning when all beneficiaries are decided. Further information is required where an inheritance tax account must be filed, even if no tax is due. If a pension turns up after the account has gone in, a corrective account is needed.

Question 18

Will the people who inherit also pay income tax?

Accepted Answer

It depends on the type of benefit and on whose death it follows. As a general rule, if the person died at 75 or over, death benefits paid to people are taxable as the recipient's income. If they died under 75, survivors' annuities and beneficiary drawdown are usually tax free, and many lump sums are tax free within the deceased's lump sum and death benefit allowance, some only if paid within two years. There are exceptions: a trivial commutation lump sum death benefit is taxable whatever the age, and dependants' scheme pensions are always taxable as pension income, even where they are excluded from inheritance tax. Where a pension passes on a second time, the successor's position depends on the age at death of the previous beneficiary, not the original saver. That is why Amy's withdrawals in the site's example are taxable after her mother dies at 75 or over, even though her father died under 75.

Question 19

Is income tax charged on the part of the pension used to pay inheritance tax?

Accepted Answer

No. Where the statutory conditions are met, pension income can be reduced by the inheritance tax and interest attributable to those pension death benefits and borne by the beneficiary. This is not a deduction for the extra inheritance tax attributable to other estate assets. If the scheme pays the tax under a payment notice, the benefits are reduced first, so income tax falls only on what is left. If the beneficiary bears the tax another way, they can reduce their taxable pension income by working with HMRC.

Question 20

Why do people say an inherited pension can be taxed at 87% or more?

Accepted Answer

The 87% is a simplified illustration of the combined family tax, not a tax rate in law, and it is not all taken from the pension. It adds three layers for each pound of pension that takes an estate over £2 million: 40% inheritance tax; a further 20% because the residence nil rate band is withdrawn at £1 for every £2, a cost that can fall on the rest of the estate; and, if death was at 75 or over, income tax at 45% for an additional rate taxpayer on the 60% assumed to be left in the pension. So 40% + 20% + (45% × 60%) = 87%. In a real estate the pension's own share of the tax is worked out under section 265 and can be smaller, which leaves more in the fund to be taxed as income, and a beneficiary in the £100,000 to £125,140 band pays an effective 60% on it (rates outside Scotland). In Steve's analysis that is how the site's worked example reaches £516,000 on a £500,000 pension.

Question 21

Can the tax on a £500,000 pension really come to £516,000?

Accepted Answer

In a specific case built on stated assumptions, yes, and the site's worked example shows every step. Mrs Miggins inherits a £500,000 pension from her husband, who died under 75 before April 2027, and dies in 2029, aged 75 or over, with an estate of £2 million before the pension, both their nil rate bands available in full and a home passing to her daughter. The pension raises her estate's inheritance tax from £400,000 to £700,000, an extra £300,000, of which the pension's own share is £140,000. Her daughter Amy, earning £100,000, draws the remaining £360,000 at £24,000 a year for 15 years and pays £216,000 of income tax at an effective 60%. That is £516,000 across the family. The example assumes the full transferable ordinary and residence nil rate bands before tapering, sufficient qualifying residential inheritance, no other material gifts or reliefs, and no investment growth or other changes. It holds today's tax rules and Amy's earnings constant for 15 years, so it is an illustration, not a forecast or a typical result.

Question 22

Can business property relief, agricultural property relief or instalments apply to a pension?

Accepted Answer

No. HMRC's technical note says the member is not treated as owning the pension's assets, and on that basis rules out business property relief, agricultural property relief, loss on sale relief and payment by instalments for pension funds. Quick succession relief does apply where the same money is taxed again within five years.

Question 23

Does leaving pension money to charity reduce the tax?

Accepted Answer

Yes. Pension death benefits paid to a UK charity are exempt, as other gifts to charity are. Separately, if at least 10% of the baseline amount of the relevant part of the estate goes to charity, that part is taxed at 36% instead of 40%. Broadly, the baseline allows for the available ordinary nil rate band and relevant reliefs and exemptions, but adds back the charitable gift and does not deduct the residence nil rate band. Pension money counts in the general part of the estate for this test, with charity lump sum death benefits counting towards the 10%. A charity lump sum death benefit is free of income tax even if the member was 75 or over, but it is only available from money purchase funds where there are no dependants when it is paid, and it must go to a charity nominated by the member or, for an inherited fund, by the deceased beneficiary.

Question 24

Are overseas pensions caught?

Accepted Answer

Yes, for long-term UK residents: notional pension property in registered schemes, qualifying non-UK pension schemes and section 615(3) schemes counts, wherever the scheme is established. For someone who is not a long-term UK resident, only schemes established in the UK count. Withholding notices and payment notices cannot be given to qualifying non-UK pension schemes or section 615(3) schemes.

Question 25

Will the nil rate bands go up?

Accepted Answer

Not under the current law before April 2031. The nil rate band of £325,000, the residence nil rate band of £175,000 and the £2 million taper threshold are frozen, with no indexation, up to and including the 2030-31 tax year. The Finance Act 2026 extended the freeze by a year.

Question 26

Can money drawn from a pension be given away free of inheritance tax?

Accepted Answer

It can, if the gift is exempt or, for an outright gift to another person, the giver survives seven years. HMRC's note confirms the April 2027 changes do not alter the existing rules for lifetime gifts. The exemption for normal expenditure out of income has three conditions, tested on the facts, taking one year with another: part of the giver's normal expenditure, made out of income, and leaving enough income to keep their usual standard of living. How the withdrawal was taxed does not by itself decide that. Money drawn from your own pension is normally taxed as income beyond any tax-free cash, while withdrawals from an inherited pension can be tax free where the person who died was under 75. An outright gift to an individual that is not exempt is normally a potentially exempt transfer, free of inheritance tax if the giver survives seven years and keeps no benefit from it. A gift into most trusts is a chargeable lifetime transfer instead, and surviving seven years does not simply make it exempt.

Question 27

What can people do about it in their lifetime?

Accepted Answer

This guide does not recommend anything, and what suits one family can cost another. The routes most discussed are: keeping the pension to meet retirement needs; spending or drawing it, which brings income tax forward; giving away money drawn from it, under the normal gift rules; leaving it to a spouse, civil partner or charity; buying an annuity, where a single life annuity with no guarantee or value protection leaves nothing to count, as HMRC's August 2026 note illustrates, and a dependants' or nominees' annuity bought with the member's own is excluded; and life cover written in trust to provide money for the tax. Each has its own conditions and costs, some cannot be undone, and whether any is worth doing depends on the person's circumstances.

Question 28

How much pension money comes within inheritance tax?

Accepted Answer

The scale of UK defined contribution pension assets is over £1 trillion. The Pensions Policy Institute's DC Future Book 2025 reports aggregate assets of £1.2 trillion in 2024. Steve uses that published figure to illustrate the scale of the pension category affected by section 150A; it is not an official estimate of the precise value newly taxable in April 2027 or of tax to be collected. Amounts may be spent, pass to exempt recipients or fall within available allowances, so being within the rules does not mean every pound is taxed.

Pensions and inheritance tax from April 2027: every question answered

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