Question: How Much Inheritance Tax is Paid on a UK Pension?
Answer: From 6 April 2027, if someone dies with a defined contribution pension they haven’t accessed, HMRC will include its value in the estate for Inheritance Tax (IHT). This is a big change from the current rules.
Following on from a previous insight we published, we would like to look in more detail as to how a pension fund will pay Inheritance Tax (IHT). From 6 April 2027, if someone dies with a defined contribution pension they haven’t accessed, HMRC will include its value in the estate for IHT.
However, IHT will be apportioned: tax is shared proportionally between the pension and the rest of the estate. That is a big change from the current position where-
- No probate was required as pensions were not included in the estate.
- The whole fund could have been used to pay part or all of the IHT (but see example of spouse exemption below).
The new rules state that the executor (or personal representatives) must calculate and collect the correct IHT, including from beneficiaries of the pension if needed.
Let’s look at some examples.
Example 1: Estate Below Nil Rate Band (NRB)
- Total estate (excluding pension): £200,000
- Unused pension pot: £100,000
- Total value for IHT: £300,000
- Nil Rate Band (NRB): £325,000
- Residence NRB not used
Outcome: No IHT payable, because total estate (£300k) is below £325k NRB. Pension pot is reported, but no tax is due.
Example 2: Modest IHT Charge, Pension Pays Proportion
- Total estate (excluding pension): £400,000
- Pension fund: £200,000
- Total estate for IHT: £600,000
- NRB: £325,000
- Taxable amount: £275,000
- IHT at 40%: £110,000
Now apportion:
Asset % of Estate IHT Share
Estate (£400k) 66.7% £110,000 × 66.7% = £73,370
Pension (£200k) 33.3% £110,000 × 33.3% = £36,630
Outcome:
- Estate pays ~£73,370
- Pension beneficiary (e.g. child) may need to pay £36,630 of IHT (Executor must coordinate this or deduct from pension).
Example 3: Spouse Exemption on Estate, Pension Bears All IHT
- Estate (to spouse): £500,000 (spouse = exempt from IHT)
- Pension fund (to adult child): £300,000
- Total value: £800,000
- NRB: £325,000
- Taxable: £475,000
- IHT at 40%: £190,000
Apportioning:
Asset % of Estate IHT Share
Estate (spouse) 62.5% £190,000 × 0% = £0
Pension (child) 37.5% £190,000 × 100% = £190,000
Outcome:
- Pension bears full £190,000 IHT because the rest is passed to spouse (exempt).
- Pension beneficiary (child) receives £110,000 after tax.
Key Notes
- IHT is not deducted by pension provider (they’re not responsible for tax).
- The executor must notify the pension scheme administrator and ensure the IHT is paid by the beneficiary or from the estate.
- If the estate lacks liquidity and the pension beneficiary refuses to pay, this could lead to disputes or delays.
Summary
Now would be a good time to see how the new rules will affect those (including expats) with UK pension funds and what can be done to plan for or mitigate the effects of the changes.
It would also be a good time to look at whether the overall estate of the UK expat is liable to IHT based on the new rules which move from domicility to long-term non-UK residency.
