Pension inheritance tax change in April 2027: what it means for families
Key takeaways
- From 6 April 2027, unused UK pensions count toward inheritance tax.
- Most estates still pay no inheritance tax. But 10,500 more face a bill.
- Money left to a spouse stays free of inheritance tax.
From 6 April 2027, unused UK pensions will count toward inheritance tax. Inheritance tax is a tax paid on what a person leaves behind. That change matters for families who plan to pass a pension to children.
This article is for information only and is not medical/financial advice.
What happened
At present, most unused pensions sit outside the tax. They do not count as part of a person's estate for this tax. An estate is the money and property a person leaves behind.
That rule will change on 6 April 2027. From that date, most unused pension funds will count toward the estate. The plan was first announced in the 2024 Autumn Budget.
Draft laws later set out how the new rule will work.
Personal representatives will report and pay any tax that is due. Personal representatives are the people who handle an estate after a death. They will include unused pension funds in the tax calculation.
Unused defined contribution pensions will count. Defined contribution means a pot built from savings and growth. Funds in drawdown will count too.
Drawdown means taking money from a pension pot in stages.
Annuity payments will not count in the same way. An annuity is a product that pays a set income for life. Lump sum death benefits from defined benefit pensions will count.
Defined benefit means a pension that pays a set income. Some benefits stay outside the new rule. Death in service benefits will stay outside the rule.
Death in service means a payment when a worker dies while employed. Dependant scheme pensions from defined benefit plans will also stay outside.
The government says pensions had become a tool to pass on wealth. It wants pensions to fund retirement first. That is the stated reason for the change.
Why it matters
Inheritance tax only applies above set tax-free limits. The main limit is £325,000. It is called the nil-rate band.
A second limit can add up to £175,000. It applies when a home goes to children or grandchildren. Together, the two limits allow up to £500,000 tax-free.
Money left to a spouse or civil partner stays free of the tax. Unused limits can pass to a spouse or civil partner. A couple can then pass on up to £1 million tax-free.
Tax at 40% applies to value above the limits.
Most estates will still pay no inheritance tax. That is the government's own estimate. Still, more families will face a bill.
The government expects 10,500 estates to gain a new bill in 2027-28.
These are estates that would not have owed tax before. About 38,500 more estates will pay extra tax. Their average extra bill will be about £34,000.
The measure should raise £1.46 billion a year by 2029-30.
The Office for Budget Responsibility tracks the wider trend. It expects the share of deaths that trigger a bill to rise. The share was 5% in 2022-23.
It could reach 10% by the end of the decade. About 67,000 families could face a bill by 2029-30.
Public worry is already high. In a June 2026 survey, 39% of Which members felt concerned. About 25% said the rules would affect their estate plans.
Some people are already spending more of their pensions. About 20% of those affected said they had started to do so. About 58% said they planned to do so.
Spending a pension can shrink the taxable estate. But it can also raise income tax. You can take 25% of a pension tax-free.
The rest is taxed like income. The personal allowance is £12,570. The higher-rate line is £50,270.
Both lines are frozen until at least 2031. Large withdrawals can push a person into a higher band. That trade-off sits at the heart of the change.
Age 75 still matters for income tax. If death comes before 75, heirs can often take pension money tax-free. If death comes after 75, withdrawals are taxed as income.
That income tax rule stays the same. Big estates face one more risk. Adding a pension can push an estate above £2 million.
That can cut or remove the home-related limit. That can raise the total bill by a large amount.
Admin work will also grow. Families must gather facts about pensions and the wider estate. HMRC guidance says schemes could hold back up to half of death benefits.
That holdback would last while the tax facts are checked. Good records will matter more than ever.
People are also talking about trusts. A trust is a legal setup that holds money for named people. A pension specialist told Financial Reporter that trusts and legacy planning tools are going mainstream.
This article does not recommend any trust or product. It only explains what sources describe.
Gifting rules are part of the same talk. The yearly gifting limit is £3,000. Larger gifts can turn tax-free after seven years.
Regular gifts from spare income can also be tax-free at once. They must meet HMRC rules. Tax rates shape these choices.
The Rule of 72 shows how savings double.
This change covers pensions, not secured credit cards.
What happens next
Sources describe a few plain next steps. First, families check beneficiary nominations. A nomination names who should get the pension after a death.
Second, they list every pension in one place. Third, they keep those records where family can find them. Fourth, they review how they take pension income.
That review weighs daily needs against the tax bill. Fifth, they plan how a future bill would be paid. Some use savings for that plan.
Others use life cover held in a trust, according to IFA Magazine. Gifting and charity giving also appear in the sources. These are topics people discuss, not steps to copy.
Executors will face more work under the new rule. They must add pension values to the tax math. Part of a pension may pay the tax first.
The government calls its figures a top-end view. They do not count changes in how people act. Faster spending or new plans could cut the count.
Final details may still shift as the date nears. Families will watch for fresh guidance from HMRC.
The April 2027 date will arrive fast. Pensions will no longer sit fully outside the tax net. Families with large pots face the biggest shift.
Smaller estates will see little or no change. Clear records and plain facts will ease the next stage.
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