Pensions and Inheritance Tax from April 2027

What changes on 6 April 2027

The Finance Act 2026 received Royal Assent on 18 March 2026. Sections 66 to 71 deal with the inheritance tax charge on pension interests, liability for the tax, withholding and payment by scheme administrators, and the matching income tax changes. HMRC's technical note confirms the start date: deaths on or after 6 April 2027.

Until then, funds in a registered pension scheme usually sit outside the estate because the scheme administrator pays death benefits at its discretion. After that date the value of unused defined contribution funds and most lump sum death benefits is added to the estate as "notional pension property". It is then taxed at the same rates and with the same nil rate bands as everything else.

Some benefits stay outside. HMRC lists them as:

• death in service benefits, where the member was in employment or other qualifying work immediately before death;
• dependants' scheme pensions, such as a spouse's pension from a defined benefit scheme;
• trivial commutation lump sums that extinguish a dependant's pension;
• dependants' and nominees' annuities bought with a lifetime annuity, including joint life annuities.

The normal exemptions still apply to whoever receives the benefit. Pension funds passing to a spouse or civil partner are covered by the spouse exemption, and charity lump sum death benefits stay exempt. If only one of the couple is a long-term UK resident, the spouse exemption may be capped. Our page on the long-term residence test covers that.

The thresholds do not move. The nil rate band is £325,000 and the residence nil rate band is up to £175,000. Both are frozen until 5 April 2031, according to the Budget 2025 overview and section 72 of the Act. The residence band tapers away by £1 for every £2 the estate is worth above £2 million, and from April 2027 the pension counts towards that £2 million. A family whose house and investments come to £1.8 million, with an £800,000 pension, now has a £2.6 million estate. It loses the whole residence band.

Who pays the tax, and how the money is found

The personal representatives must report the tax on notional pension property, and they are liable to pay it. That holds even though they never control the pension money. Beneficiaries who receive pension benefits are jointly liable with the personal representatives for the tax that relates to those benefits. In practice the pension's share of the bill can be paid in three ways:

1. From the free estate, with the personal representatives then recovering it from the pension beneficiaries.
2. By the scheme, using a payment notice. Under the Pensions Direct Payment Scheme, the beneficiary or the personal representatives can tell the scheme administrator to pay the tax direct to HMRC. The notice must be for at least £1,000, and the scheme has 35 days to pay.
3. By the beneficiary, who takes the benefits and pays the tax from them.

While the tax is being worked out, the personal representatives can send a withholding notice. This tells the scheme to hold back up to 50% of a beneficiary's entitlement for up to 15 months after the end of the month of death. It cannot apply to exempt beneficiaries or excluded benefits. A scheme that ignores a valid withholding notice, or does not act on a payment notice, becomes liable for the tax itself.

The ordinary deadline still applies. Tax is due at the end of the sixth month after the month of death, and interest runs after that. Burges Salmon points out that the tax on pension property cannot be paid in instalments. Executors will need to find pension arrangements early and ask for valuations at the start of the administration, not at the end. Farrer & Co expects probate to take noticeably longer in the first years.

Inheritance tax plus income tax: the precise position

People often call this a "double tax". The phrase is partly right, and the exact rule matters more than the label.

Death before 75. Lump sum death benefits are generally free of income tax up to the beneficiary's share of the lump sum and death benefit allowance, which is normally £1,073,100. Inheritance tax applies from April 2027, but in most cases income tax does not. The exceptions are scheme pensions and amounts above the allowance.

Death at 75 or over. Beneficiaries pay income tax at their marginal rate on what they draw. They also bear the pension's share of the inheritance tax. Section 70 of the Act stops income tax being charged on the same slice of value that went in inheritance tax. If the scheme pays the inheritance tax under a payment notice, the benefit is reduced first, and HMRC states that income tax is then charged "on the pension benefits net of Inheritance Tax". If the beneficiary pays the inheritance tax from other money, a deduction from the taxable pension income gives the same result.

So the pension is not taxed twice on the full amount. The fund suffers inheritance tax at up to 40%. Whatever is left is taxed as the beneficiary's income. For an additional rate taxpayer the combined burden is 1 minus (0.60 × 0.55), which is 67%. If adding the pension also wipes out the residence nil rate band, the extra inheritance tax on the rest of the estate pushes the effective cost of the pension higher. Burges Salmon puts the worst case at 89%, or 91% in Scotland.

An illustrative example, with the arithmetic shown

This example is illustrative only. It uses round numbers and simplified assumptions.

Assumptions. A widowed client dies aged 78 after 6 April 2027. No unused nil rate band was transferred from the late spouse. Free estate of £1,700,000, including a home left to the children. Defined contribution pension fund of £900,000, nominated to one adult child. No lifetime gifts, no reliefs, no other exemptions. The inheritance tax is shared across the estate in proportion to value. The child is an additional rate taxpayer, and for simplicity all of the pension drawn is taxed at 45%.

The inheritance tax rises by £430,000. Of that, £360,000 is 40% of the pension itself, and £70,000 is 40% of the £175,000 residence band that was lost. Total tax rises by £288,250. Of the £900,000 pension, the child keeps £321,750, or about 36%. That leaves an effective rate of about 64% on the pension. A married client who leaves everything to a spouse pays nothing on the first death, so the same bill usually lands on the second death.

The old spending order, and what replaces it

Since the pension freedoms, the usual advice to wealthy retirees has been simple. Live on cash, general investment accounts, ISAs and bond withdrawals, and leave the pension alone, because it passed outside the estate. Farrer & Co says that approach no longer works from April 2027. Once the pension is in the estate, it is just another asset taxed at 40% on death. For anyone who dies at 75 or over, it also carries income tax in the hands of beneficiaries.

That changes the question to: who pays income tax on this money, at what rate, and when? Some patterns are emerging among advisers:

• Drawing more from the pension during life. If the member's marginal rate is lower than the rate a beneficiary would pay after 75, drawing income now and spending or giving it away can leave the family better off. A member already paying 45% may gain little from this.
• Tax-free cash used for gifts. Taking the pension commencement lump sum and making outright gifts or gifts into trust starts the seven-year clock. Under the gov.uk gift rules, taper relief reduces the tax on gifts made three to seven years before death, but only on the part above the nil rate band.
• Regular gifts from surplus income. Pension income that is not needed for normal living costs can be given away under the normal expenditure out of income exemption. These gifts leave the estate at once, with no seven-year wait, provided the pattern is regular and the donor's standard of living is kept. Records matter here.
• Nominations reviewed. Nominating a spouse delays the charge to the second death. Nominating grandchildren or other beneficiaries changes who carries the income tax later.

For many families, this is the whole answer: a revised spending order, a properly documented gifting plan, nominations updated, and wills and trusts checked for the new figures. None of it needs a new financial product.

Life cover written in trust to meet the bill

Where the tax cannot sensibly be reduced, insurance can pay it. A whole of life policy written in trust pays out to the trustees, outside the insured person's estate. That gives the family cash to pay inheritance tax within the six-month window without forcing sales of property or waiting for the pension scheme. For a married couple who leave everything to each other, the liability usually arises on the second death. A joint life, second death policy is therefore the common structure, as Farrer & Co notes.

The trust drafting matters. A policy left outside trust simply adds its proceeds to the estate it was meant to protect. Premiums are gifts to the trust. They are often covered by the annual exemption or the surplus income exemption, and pension income can fund them. Many clients find this a neat use of income they would otherwise have to draw and pay tax on anyway.

Cover is underwritten, so health and age decide the price. Premiums for someone in their late seventies can be high compared with the liability being covered. Our page on inheritance tax planning with a life policy covers policy types, trust choices and how the sum assured is usually set.

Where an offshore bond fits when assets are reordered

An offshore bond does not shelter assets from inheritance tax just by being a bond. If an individual owns it outright, its full value is in their estate. Its uses in this context are narrower.

As a gifting vehicle. Bonds are made up of segments and can be assigned into trust, which makes them a common base for loan trusts and discounted gift trusts. Both let a client start reducing the estate while keeping either access to the capital or a fixed stream of withdrawals. Those structures are explained on our page on loan trusts and discounted gift trusts. As drawing more from the pension becomes more attractive, some clients will use pension income for spending and keep a bond in trust growing for the next generation.

As a source of income that can be timed. Gains inside an offshore bond roll up without UK tax until a chargeable event. Withdrawals of up to 5% a year of the premium can be deferred for up to 20 years. Under the old spending order, many families drew on bonds before pensions. Now the comparison is less clear-cut, and the timing of chargeable gains, including any gain on the death that ends the policy, belongs in the same spending plan as pension drawdown. See our pages on the 5% withdrawal allowance and on chargeable event gains and top slicing relief.

What it cannot be for UK residents. A bespoke portfolio wrapped in a policy, the structure often described as private placement life insurance, generally runs into the personal portfolio bond rules. These impose a yearly deemed gain on a UK resident policyholder who can select the underlying assets. A policy for a UK resident normally has to stick to the permitted asset categories. The details are on our personal portfolio bond rules page.

For a family with an existing offshore bond, the April 2027 change is a reason to look again at who owns it, whether it should sit in trust, and when to draw from it compared with the pension. It is rarely a reason to start a new one. Our UK library groups related pages by topic.

Questions about pensions and inheritance tax from April 2027

Sources and editorial notes

Primary sources: Finance Act 2026 (sections 66 to 72); HMRC, Technical note: Inheritance Tax on pensions and Technical note 2 (27 August 2026); Budget 2025 overview of tax legislation and rates; gov.uk guidance on the residence nil rate band, gifts and lump sum allowances. Commentary: Mayer Brown, Burges Salmon, Farrer & Co, Standard Life and Royal London. HMRC has said more guidance will follow before April 2027, and details of the mechanics may change. Figures are for 2026 to 2027. The worked example is illustrative and uses simplified assumptions stated in the text.

This article is general information, not tax, legal or investment advice.