The Finance Act 2026, which received Royal Assent on 18 March 2026, will bring most unused pension funds and pension death benefits into the value of a person's estate for inheritance tax purposes. The change applies to deaths on or after 6 April 2027.
Until now, most defined contribution pensions have passed to beneficiaries outside the estate, and often free of inheritance tax altogether. From 6 April 2027, that protection is largely removed. Inheritance tax at 40 per cent may apply to pension wealth above the available thresholds, in the same way as to other estate assets.
HMRC's analysis estimates that around 10,500 additional estates a year will face an inheritance tax liability from 2027 to 2028, and a further 38,500 will pay more. The average increase in liability is around £34,000.
The change affects most people with a UK pension. Some categories of pension or pension benefit remain outside the new rules.
The new rules sit on top of the existing income tax treatment of inherited pensions, rather than replacing it. Where the pension holder dies after age 75, beneficiaries already pay income tax on withdrawals at their marginal rate. From April 2027, those same funds may also fall within the estate for inheritance tax.
The government has confirmed that an income tax deduction will be available so that inheritance tax already paid on a pension is taken into account when income tax is calculated on later withdrawals. This reduces, but does not always eliminate, the effective combined tax burden.
In practice, the structure of withdrawals, and the order in which different assets are drawn or transferred, will matter more after 2027 than it has done before.
Under the new rules, personal representatives will be liable for reporting and paying inheritance tax due on unused pension funds. The Finance Act 2026 introduces a process for them to direct pension scheme administrators to withhold up to 50 per cent of taxable death benefits for up to 15 months while the inheritance tax position is settled, and to instruct schemes to pay inheritance tax directly to HMRC.
In practice, beneficiaries may receive pension funds more slowly than they have done historically, and death administration will be more complex.
Six in-depth articles that work through the practical implications of the new rules.
A plain-English summary of the Finance Act 2026 changes, who is affected and who is not.
Read articleHow the income tax and inheritance tax rules interact, before and after April 2027.
Read articleWhat the spousal exemption still does for couples, and why the bill on the second death may be larger.
Read articleWhy the order in which you draw your retirement assets may need to change.
Read articleGifting, trusts, charity and life cover, considered as a combined planning surface.
Read articleHow the 2027 changes interact with Business Relief, exit timing and post-exit wealth.
Read articleThe Financial Conduct Authority does not regulate Wills, Trusts or Tax advice. Tax treatment depends on individual circumstances and may change in the future. The value of your investments can go down as well as up, so you could get back less than you invested.
Peter Rose, our Chartered Financial Planner and Pensions Specialist, leads our work on the 2027 changes. The first conversation is free, with no obligation and no products discussed.
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