UK Pension Inheritance Tax Changes 2027: Your Questions Answered

From 6^th April 2027, most unused defined contribution pension funds and death benefits will be brought within the scope of UK inheritance tax. Currently, these funds generally sit outside the estate when inheritance tax is calculated. From that date, they will usually be included, meaning many more estates will be drawn into the inheritance tax net. Estates newly brought over IHT thresholds will face a 40% inheritance tax charge that did not previously apply.

This is not a proposal. The change is already law, having received Royal Assent as part of the Finance Act 2026. Not everyone will be affected - most estates will continue to pay no inheritance tax at all - but for those with larger pension funds, the picture will change significantly.

Pensions were originally designed to fund retirement. Over time, however, they have increasingly been used and marketed as a tax-efficient way to pass on wealth, with holders drawing on other assets first and leaving pension funds untouched so they could later pass to the next generation free of inheritance tax. The government's stated aim is greater consistency between pensions and other assets, such as property, cash and investments, which already sit inside the estate.

Everyone has a standard nil-rate band of £325,000, below which no inheritance tax is due. If a main home is left to direct descendants, such as children, grandchildren, stepchildren or adopted children, a further residence nil-rate band of £175,000 is available, taking an individual's threshold to £500,000. 

Married couples and civil partners can combine both allowances, giving a potential combined threshold of £1 million where a home passes to descendants. 

Anything above the available threshold is taxed at 40%, reduced to 36% where at least 10% of the net estate is left to charity. 

Where an estate exceeds £2 million, the residence nil-rate band begins to taper away, reducing by £1 for every £2 over that threshold until it is lost entirely at £2.35 million for an individual. All of these figures - the nil-rate band, the residence nil-rate band and the £2 million taper threshold - are currently frozen, with the government having confirmed no increase before 2031. 

Because none of these thresholds are rising, bringing pension funds into the estate from April 2027 will push a greater number of estates towards, or over, these limits than would otherwise have been the case.

That depends on the age of the death. If the death occurs before age 75, pension funds pass to the nominated beneficiaries who usually pay no income tax. If the death occurs after the age of 75, however, beneficiaries pay income tax at their own marginal rate when they draw the funds.

Potentially, yes, depending on the age at which the pension holder dies. From April 2027, the pension of someone who dies before 75 will be liable for inheritance tax, but their beneficiaries can still draw it free of income tax - one layer of tax. 

If they die after 75, inheritance tax will be applied, and their beneficiaries will pay income tax on withdrawals - two layers of tax on the same money. It is this stacking effect, rather than any new rule specific to age 75, that creates the sharper impact after that age.

Where both taxes apply, the fund faces inheritance tax at 40%, then income tax on withdrawals at the beneficiary’s marginal rate. Together, this can significantly reduce the net sum beneficiaries receive compared with the original pension value. 

Beneficiary drawdown, available on many self-invested personal pensions (SIPPs), allows beneficiaries to draw down an inherited pension gradually rather than receiving it as a single lump sum. Without this feature, funds are often paid out as cash, with a large lump sum landing in one tax year and potentially triggering a significant income tax bill. This may be the case for older pensions. 

Beneficiary drawdown gives beneficiaries greater control - they can use their own tax bands each year and spread withdrawals over several years, which can reduce the overall income tax paid. It does not remove the 40% inheritance tax charge, but it does give beneficiaries meaningful control over how the income tax element plays out.

It could. As outlined above, when an estate exceeds £2 million, the residence nil-rate band - the additional allowance available when a home passes to direct descendants - tapers away by £1 for every £2 over that threshold.

Because pension funds will now generally count towards the value of the estate, including one could push a previously unaffected estate over the £2 million threshold, reducing the amount that can pass tax-free and increasing the overall inheritance tax bill. This makes reviewing the combined value of property, savings, investments, and pensions together particularly important, rather than looking at any one asset in isolation.

The spousal exemption itself is not being removed and continues to apply between couples who are both UK long-term residents. 

However, it does not apply where assets pass from someone who is UK long-term resident to a spouse who is not - in that scenario, only the standard nil-rate band applies rather than an unlimited exemption, and inheritance tax could become payable on the first death rather than being deferred until the second. This is a nuanced area of the rules, and couples in this position should seek a review of their specific circumstances with a cross-border specialist.

No - this is an extremely common misconception, and an important one to correct.

Since April 2025, exposure has been determined by long-term UK residence rather than the older concept of domicile. Broadly, anyone who has been UK tax resident for ten of the past twenty years is taxed on worldwide assets.

UK assets, however, always remain in scope, wherever the holder lives. A UK-registered pension counts as a UK asset, so from April 2027 it will generally be liable for inheritance tax even if the holder moves abroad and never sets foot in the UK again.

Several areas are worth revisiting well before the changes take effect:

• Beneficiary nominations, to ensure they still reflect current wishes
• Wills and the wider estate plan, given that the value ultimately received by each beneficiary may now look different
• Whether your pension offers beneficiary drawdown, and if not, what the alternatives are
• Retirement income strategy, including whether it still makes sense to leave pension funds untouched for as long as possible
• Your total estate value, particularly if it sits close to or above £2 million
• For expats and internationally mobile families, how UK rules interact with the rules of any other country where you or your beneficiaries are resident 

Planning for inheritance tax takes time, and no two situations are the same. The sooner you understand your own position, the more options you are likely to have available to you and the more time you will have to talk to your loved ones and make decisions. The last thing you want is to make a rushed decision just before the changes are introduced next year. 

Here at Hoxton, we have specialist teams with expertise in pensions and financial planning, estate planning, and tax. If you’d like to comprehensively review your situation, the next step is to reach out for a no-obligation conversation which will clarify your current position, identify risks and inefficiencies and explore your options. 

Book your free review  today.