Understanding UK inheritance tax & the new pension reform changes coming in 2027

From April 2027, the UK will see some of the biggest changes to pensions and Inheritance Tax (IHT) in decades. These reforms will fundamentally alter how pension wealth is treated on death and will impact millions of people—especially those using pensions as a key part of their estate planning strategy.

This guide breaks down what’s changing, who’s affected, and what steps you may want to consider. 

1. A quick refresher: What Is inheritance tax?

Inheritance Tax is charged at 40% on estates exceeding the standard nil‑rate band (£325,000), plus any available residence nil‑rate band.

Currently, most unused pension funds and lump‑sum death benefits fall outside a person’s estate, making pensions a highly tax‑efficient wealth‑transfer tool.

This is now changing. 

2. What’s changing from April 2027?

From 6 April 2027, most unused pension funds and pension death benefits will be brought into the value of an individual’s estate for IHT purposes

✔ Key Change

Unused pensions = part of your estate = potentially taxed at 40%.

This includes:

• Defined contribution pension pots
• Defined benefit lump-sum death benefits 

❌ Exceptions (remain outside IHT):

• Death‑in‑service benefits paid from a registered pension scheme
• Dependant’s scheme pensions
• Charity lump‑sum death benefits
• Life insurance policies written in trust 

3. New responsibilities for personal representatives

The reforms shift administrative duties:

Before 2027:

Pension scheme trustees often handled reporting, as benefits fell outside the estate.

After 6 April 2027:

Personal representatives must:

• Report unused pension funds and death benefits
• Pay any IHT due on those pension assets
• Work closely with pension scheme administrators

Pension schemes will have four weeks to provide Personal Representatives with valuations of pension benefits, giving clarity but also tightening timescales during probate.

 

4. Could pension wealth be taxed twice?

Yes — and this is one of the biggest concerns raised.

 

• Pension funds brought into the estate may face 40% IHT
• Beneficiaries drawing from inherited pensions may also pay income tax up to 45% (if the deceased was over 75)

 

This can create a combined tax hit of 64–67% or more.

This is particularly critical for:

• Larger pension pots
• Beneficiaries who are higher‑rate or additional‑rate taxpayers
• Individuals using pensions for intergenerational wealth planning

5. What about spouses and civil partners?

The good news:

Spousal inheritance remains fully exempt—a surviving spouse or civil partner pays no IHT, and unused allowances remain transferable.

This means married couples and civil partners may still pass on up to £1 million tax‑free on second death in certain circumstances.

6. What should you be doing now?

Here are practical steps ahead of 2027:

✔ Seek advice on estate planning

Pensions may no longer be the IHT‑free tool they once were. Seeking professional advice could save your family from a very expensive tax bill.

✔ Review your pension nominations

Ensure they still reflect your wishes.

✔ Consider life insurance in trust

Policies written in trust remain outside the estate.

✔ Understand the tax impact for beneficiaries

This is especially important if:

• you have a large pension pot
• you expect to die over age 75
• your beneficiaries are higher‑rate taxpayers

✔ Review charitable giving strategies

Pension wealth left to charity remains exempt. 

Final Thoughts

The 2027 pension reform marks a major shift in UK tax planning. For years, pensions have been considered one of the most effective tools for passing on wealth tax‑efficiently. Once the new rules take effect, this landscape changes dramatically.

Your pension may:

• Form part of your taxable estate
• Trigger significant IHT
• Still create income tax liabilities for beneficiaries

Now is the time to plan proactively. 

For more help and advice or to receive a complimentary guide covering wealth management, retirement planning or Inheritance Tax planning, contact Yorkshire Financial Planning on 01482 275540 or complete our contact form here.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

SJP Approved 20/04/2026