Most unused pension funds and pension death benefits will be brought within the member’s estate for Inheritance Tax.
For years, many defined contribution pensions have sat outside the member’s estate for UK Inheritance Tax when death benefits were paid under pension-scheme discretion. That has made pensions particularly attractive for estate planning. From 6 April 2027, that position changes significantly.
Legislation enacted in Finance Act 2026 brings most unused pension funds and pension death benefits into the value of the deceased member’s estate for Inheritance Tax purposes from 6 April 2027. The change can affect people living abroad as well as people living in the UK, depending on the deceased person’s exposure to UK Inheritance Tax.
What changes on 6 April 2027?
Most unused pension funds and pension death benefits will be brought within the member’s estate for Inheritance Tax. The previous distinction that often kept discretionary pension death benefits outside the estate will largely disappear.
HMRC’s 2026 technical note confirms that the rules apply to deaths on or after 6 April 2027 and explains the practical framework for identifying pension property, valuing it, allocating it to beneficiaries and dealing with the tax.
If you hold substantial UK pension assets and live abroad, the 2027 changes are a good reason to review your pension and estate planning together rather than waiting until the rules are already in force.
Does this mean every pension will suffer 40% tax?
No. The change does not mean every pension automatically loses 40%. Inheritance Tax is calculated across the estate and depends on available exemptions and allowances, including the nil-rate band and, where relevant, spouse or civil-partner exemption and the residence nil-rate band.
HMRC estimates that most estates will still have no Inheritance Tax liability. But estates that already use their available allowances – particularly those with substantial property, investments and pension wealth – can see a material increase.
Which pension benefits are excluded?
The legislation and HMRC guidance contain specified exclusions. Death-in-service benefits payable from registered pension schemes are outside the new charge, and certain dependent scheme pensions and continuing annuities are treated differently.
The precise classification matters. “Pension” is not one single asset type for these rules, so trustees, administrators and personal representatives will need to identify which benefits are actually within scope.
What about beneficiaries and income tax?
Inheritance Tax is not the only tax to consider. Existing UK income tax rules on inherited pension benefits continue to matter. In broad terms, the age of the member at death and the type and timing of the beneficiary payment can affect whether the beneficiary also faces income tax when drawing from the inherited pension.
This creates the possibility of both estate-level Inheritance Tax and later income tax on beneficiary withdrawals in some circumstances. HMRC’s technical material specifically addresses how the new IHT regime interacts with existing income-tax rules, which is why simplistic statements such as “the pension will be taxed at 40%” can be misleading.
Who is responsible for reporting and paying the IHT?
The final framework places the main reporting and payment responsibility on the deceased’s personal representatives rather than making pension scheme administrators responsible for the entire calculation.
Where Inheritance Tax is expected to be due, the rules provide mechanisms under which pension administrators can withhold part of taxable benefits and can make payments towards the tax before the remainder is released. This means executors will need timely information from pension schemes and pension beneficiaries.
beneficiaries. Why expats should not assume they are outside UK IHT
Living abroad does not by itself answer whether a person is exposed to UK Inheritance Tax. The UK moved to a residence-based IHT framework from April 2025, with long-term residence rules determining the extent to which non-UK assets may be within scope after a person leaves or enters the UK.
For an expatriate with UK pension wealth, UK property or a long history of UK residence, the correct analysis should therefore start with the person’s Inheritance Tax residence status and the composition of the whole estate – not just the pension.
Does transferring to a QROPS solve the problem?
It should not be assumed that moving a UK pension overseas automatically removes the 2027 IHT issue. The new pension-IHT rules are deliberately broad, and HMRC’s consultation material addressed qualifying non-UK pension schemes as well as UK arrangements.
A QROPS transfer can also trigger a 25% overseas transfer charge unless an exemption applies. Any pension transfer undertaken primarily for inheritance-tax reasons therefore needs careful analysis of the transfer tax, the receiving jurisdiction, investment and regulatory protections, future residence and the actual IHT result.
What planning should be reviewed before 2027?
First, update pension beneficiary nominations and wills so that the overall estate plan is coherent. Second, obtain current values for pensions and other assets and model the estate on deaths both before and after 6 April 2027. Third, review retirement-income needs before deciding whether drawing more from a pension is sensible.
Drawing pension money solely to “avoid IHT” can be counterproductive if the withdrawn cash simply accumulates in a bank account and remains in the taxable estate. Equally, gifting, spending, insurance and trust planning each have their own tax, control and affordability consequences.
A pension is now part of the estate-planning conversation
The practical effect of the reform is that advisers will increasingly need to consider pensions, investments, property, wills, beneficiary nominations and retirement income together. The pension should not be viewed as a separate IHT-free silo.
For expatriates, another layer is added: the estate may also be subject to succession or inheritance rules in the country of residence. UK tax efficiency alone is not enough if the proposed plan conflicts with local tax or succession law.
How Aisa International CZ can help
If you hold substantial UK pension assets and live abroad, the 2027 changes are a good reason to review your pension and estate planning together rather than waiting until the rules are already in force.
Important: This article provides general information only and is not personal financial, investment, pension, legal or tax advice. Tax treatment depends on individual circumstances and may change. Cross-border cases should be reviewed with appropriately regulated advisers and, where needed, qualified tax professionals in the relevant jurisdictions.
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