Inheritance tax (IHT) is a tax on the estate (the property, money and possessions) of someone who’s died and recently the government has proposed some fundamental changes as to what’s included within an estate.

IHT is charged at 40% and the estate threshold, for paying IHT, currently stands at £325,00 and the government has recently published plans to bring unused pension funds within the scope of IHT from April 2027
Here are a few things to know about this and other proposed changes:

Unused pensions will become part of your estate

Currently, defined contribution (DC) pensions, where you build up a pot of money to fund your retirement, are not included in your estate for IHT. This means beneficiaries don’t usually pay IHT, although income tax may still apply depending on your age at death. However, from 6 April 2027, this will change. Any unused pension funds left behind will be considered part of your estate and may be taxed at 40% if your estate exceeds the IHT threshold.

The usual IHT exemptions will still apply. A surviving spouse or civil partner never pays IHT on anything you leave them, regardless of the amount, as long as you’re both UK-domiciled. Unused allowances can pass to them too.

Personal Representatives will need to Report Pension Details

Under the latest proposals, personal representatives (the people managing the estate) will be responsible for reporting and paying any IHT due on pensions.

Once notified of a death, schemes will have four weeks to provide personal representatives with the value of any unused pension funds and death benefits. They will also need to supply information to help calculate what is owed.

Families will need to track down pensions with different balances and contact each scheme before applying for probate. This could delay the winding up of the estate.

Some Death Benefits Remain Exempt

Death-in-service benefits, from registered pension schemes, will remain out of scope for IHT, reversing earlier proposals to include them.

This will apply whether the scheme is discretionary (where scheme administrators decide who receives the payment) or non-discretionary (where it is paid directly to a named beneficiary).

Benefits under certain public sector schemes, such as the NHS Pension Scheme, will not be affected and existing IHT exemptions will still apply, including for lump-sum death benefits left to a surviving spouse, civil partner or registered charity.

Annuities to be Exempt

The government has confirmed that joint life annuities, which continue paying income to a chosen beneficiary after your death, will continue to be exempt if it goes to a spouse or civil partner.

For unmarried couples and children, the rights of the survivor are separate from the rights of the member and the survivor’s rights, paid from a joint life annuity, are not part of the member’s estate and are not in scope of inheritance tax.

Single-life will be unaffected as payments usually stop when you die.

Options will be Offered for Estates that Can’t Pay

The government said it would take steps to deal with the ‘small number’ of estates that don’t have the means to pay the tax due on its pensions.

Three proposed ideas include:

• Personal representatives pay the tax due from the deceased’s other money.
• The person receiving the death benefit pays the tax owed themselves from their own money.
• The person receiving the death benefit can ask the pension scheme to take out the IHT before they get the money.

Most Estates Won’t Pay IHT ….
but Some Might Pay More!

The government estimates that around 213,000 estates will include pension wealth in 2027-28. Of these, around 10,500 will face an IHT bill. A further 38,500 estates are expected to pay more tax than they would have otherwise.
For those affected, the average additional IHT bill is expected to be £34,000.

The government says it will raise an estimated £1.34bn a year from 2028-29. This is double the estimate of £640m in the first year.

You May Also Have to Pay Income Tax

Alongside IHT, some beneficiaries may still have to pay income tax on money inherited from a pension.

If someone dies before the age of 75, any unused pension funds left to a beneficiary are usually paid tax-free. If they die at or after 75, income tax is due on any money withdrawn from the inherited pension, charged at the beneficiary’s marginal rate. This means some beneficiaries could face both income tax and IHT on the same pension fund once the new rules come in.

HMRC has said it will develop systems to support the process and allow pension beneficiaries to reclaim any overpaid income tax if needed.

It has also confirmed that if a beneficiary asks the pension scheme to pay their IHT liability on their behalf, this will be treated as an authorised payment and will not trigger an additional tax charge.