How Unused Pension Funds Will Impact Your IHT Bill from 2027

From 6 April 2027, a major change will affect how HMRC treats unused pension funds for inheritance tax (IHT) in the UK. For the first time, most untouched pension pots and death benefits will count as part of the deceased’s estate for IHT purposes. As a result, many families may face higher tax bills and will need to plan their estates more carefully.

The government introduced this change to prevent people from using pensions mainly to transfer wealth. They want pensions to fund retirement, not to reduce taxes.

In this article, we explain what’s changing, who it will affect, how to prepare, and why speaking to a professional advisor is more important than ever.

What’s Changing from April 2027?

Currently, unused pension funds are often passed on tax-free, especially when the pension holder dies before age 75. But from 6 April 2027, this will no longer be the case.

Key changes include:

• Unused pension pots will be included in the estate for IHT purposes.
  
• The current IHT rates may now apply at 40% on amounts above the nil-rate band.
  
• Pension scheme administrators will report the value of the pension, but the personal representative (executor) must pay the IHT.
  
• Most exemptions, like those for spouses, civil partners and charities, still apply.
  
• Death-in-service benefits remain outside of the IHT scope.
  

The government is introducing these changes under a new section of the Inheritance Tax Act 1984 (section 150A). It has already published the draft legislation, and the consultation remains open through 15 September 2025.

Who Will Be Affected?

The new rules affect a wide group of people:

• Individuals with large pension pots
  Those with significant pension wealth may find their estate exceeds the IHT threshold once pension savings are added in.
  
• Beneficiaries of unused pensions
  Family members or other beneficiaries who inherit pensions may now have to share responsibility for paying IHT.
  
• Personal representatives
  Executors and administrators of estates will need to report the value of unused pensions and ensure any IHT is paid within six months of death.
  
• Pension scheme administrators
  They must provide information to personal representatives to support IHT reporting, though they won’t be responsible for paying the tax.
  

Current IHT Rates and Thresholds: A Quick Recap

The current IHT rate is 40%, charged on the value of an estate that exceeds the nil-rate band of £325,000. This threshold is frozen until at least April 2030.

However, married couples and civil partners can pool their allowances and use the residence nil-rate band, potentially raising their total IHT-free threshold to around £1 million.

With inheritance tax on unused pension funds taking effect, more families may face unexpected IHT bills—especially those who assumed pensions were tax-free assets.

Why the Change?

The Treasury states that this change aligns pensions with other types of wealth. Ministers believe people increasingly use pension pots to pass on wealth instead of funding retirement.

The government also estimates the change will raise £640 million in its first year (2028–29), growing to £1.34 billion annually, affecting around 40,000 estates with an average tax increase of £34,000.

Exemptions That Still Apply

While this reform is significant, some important exemptions remain:

• Spouses and civil partners continue to benefit from full IHT relief.
  
• Charities are exempt when they receive death benefits.
  
• Death-in-service lump sums remain outside the IHT net if the person was still employed at the time of death.
  
• Certain defined benefit (DB) schemes and dependants’ pensionsmay still be eligible for relief under certain conditions.
  

What About Income Tax?

The inheritance of pension benefits may also trigger income tax, depending on the age of the deceased:

• If the pension holder dies before age 75, the inherited pension is usually income tax-free.
  
• If they die on or after turning 75, any lump sums or drawdown income are taxed at the recipient’s marginal rate.
  

When HMRC directs a pension scheme administrator (PSA) to pay IHT on behalf of a beneficiary, the administrator makes the payment directly. This is treated as an authorised payment and not taxed as income.

If the PSA doesn’t make the payment and the beneficiary receives the full pension value, income tax may be due, and the beneficiary must contact HMRC to request a refund of overpaid tax. HMRC plans to release detailed guidance on this process in the future.

Administrative Challenges

This change will bring more complexity to an already difficult time for bereaved families. The current IHT system is not yet digitised, and HMRC has admitted that a new system must be developed to handle these changes. This will have a “significant operational resourcing impact” on the department.

Critics of the policy, including industry experts, have expressed concern. They argue that the added complexity and strict six-month deadline could overwhelm executors, especially in cases with large or complex estates.

Estate Planning Becomes More Important

With these changes, those with significant pensions should start reviewing their estate planning strategy now.

Here are some steps to consider:

• Review your pension nominations: Make sure they are up to date and reflect your current wishes.
  
• Speak to an estate planning specialist: A financial advisor or accountant can help you understand your potential IHT liability and suggest ways to reduce it.
  
• Use other tax allowances: For example, make use of the residence nil-rate band and consider gifting strategies.
  
• Think carefully about pension drawdowns: Withdrawing from your pension earlier may reduce the value of your estate and the future tax burden on your beneficiaries.

Need Support with Inheritance Tax on Unused Pension Funds?

The changes coming in April 2027 mark one of the most significant updates to the UK’s pension and inheritance tax rules in recent years. While most families will still not be affected by IHT, thousands more estates will now fall within its scope due to the inclusion of unused pension pots.

This means careful planning is essential—not just to manage tax liabilities but to reduce the administrative burden on your loved ones. Delays in dealing with IHT could cause financial pressure on families at an already challenging time.

Apex Accountants has been helping UK families with pension tax planning and estate management since 2006. Our experienced advisors understand the impact of IHT changes and offer tailored guidance to suit your situation.

We work closely with personal representatives, beneficiaries, and pension providers to ease the reporting burden and keep everything on track. Whether you’re preparing your estate or dealing with probate, we’re here to help.