The April 2027 Pension Inheritance Tax Change - What Every Family Needs to Know Now

What is changing in April 2027?

Until 5 April 2027 a pension sits outside your estate for inheritance tax purposes. On death, the remaining pension pot passes to nominated beneficiaries without any IHT charge - a position that has underpinned estate planning for decades and made pensions one of the most efficient inheritance vehicles available in the UK.

From 6 April 2027 that position ends. Unused pension funds and lump-sum death benefits will be included in the value of your taxable estate. The pot you have spent forty years building, that you may have specifically left untouched to pass to your children, will be added to the value of your home, your savings and your investments for the purpose of calculating IHT at 40% above the available thresholds.

This is not a proposal under consultation. Finance Act 2026 received Royal Assent on 18 March 2026. The implementation date - 6 April 2027 - is fixed in law. The only question is what you do between now and then.

Who is affected?

The change affects any family whose total estate - once the pension is included - exceeds the available nil rate bands. With the standard nil rate band frozen at £325,000 per person and the residence nil rate band capped at £175,000 per person, a married couple with a family home of £500,000 and a combined pension of £400,000 is now firmly inside the IHT net where, six months earlier, they would not have been.

Defined contribution pensions are the principal target: SIPPs, personal pensions, workplace money purchase schemes - any arrangement where there is an unspent balance at the date of death. Families who deliberately left their pension untouched as an inheritance planning strategy are the most exposed, because the entire untouched balance is now in scope.

Company directors, business owners and the self-employed who have accumulated significant pension wealth as part of long-term remuneration planning will see a step change in their exposure. So will British expats returning from the UAE, Singapore or elsewhere with QROPS or other overseas pension arrangements that fall within UK IHT after a return to UK domicile.

A worked example - the numbers

Take a married couple in their sixties. Family home in Dorset worth £550,000. Cash savings and ISAs of £200,000. A combined pension pot - built up over forty years of professional life - of £450,000. No business assets. A reasonably typical position for a couple who have worked hard and saved sensibly.

Before 6 April 2027, the estate for IHT purposes is £750,000. The pension passes outside the estate to nominated beneficiaries free of IHT. With nil rate bands and the residence nil rate band properly used, the IHT bill is modest and manageable.

After 6 April 2027, the estate for IHT purposes is £1,200,000. The pension is now inside the estate. The additional inheritance tax attributable to the pension inclusion alone could easily exceed £100,000 - money the couple had specifically planned to pass to their children, now going to HMRC instead. The structure of their finances has not changed. The law has.

The double taxation problem

There is a second layer of tax most families are not yet aware of. A beneficiary receiving inherited pension funds after April 2027 may also be subject to income tax on those funds at their marginal rate, on top of the IHT the estate has already paid on the same money. For a higher-rate or additional-rate taxpayer the effective combined tax burden can substantially exceed 40%.

There is also a cash-flow problem. Pension administrators may withhold up to 50% of taxable pension benefits for up to 15 months from the date of death while the IHT liability is calculated and settled. In practical terms, beneficiaries may wait over a year to receive a significant portion of the inheritance they were expecting.

The combination of IHT, income tax and the administrative delay turns what used to be the cleanest, fastest part of an estate into one of the most complicated. Families who do nothing now will be the ones absorbing that complication when it matters most.

The spousal exemption

Pension death benefits passing to a surviving spouse or civil partner remain exempt from IHT. That part of the existing position is preserved. The April 2027 change bites on assets passing beyond the spouse - to children, grandchildren and other beneficiaries.

For couples who planned to leave the pension to the surviving spouse and then on to the children at second death, the second death is where the tax exposure crystallises. The first death may still look clean. The second death - often years later, often without warning - is where the bill lands. Planning needs to model both events, not just the first.

What you can still do before April 2027

Review your pension nomination forms. Most people completed a nomination years ago and never looked at it again. The nomination determines who receives the pension on death and under what structure. A fundamental change in tax treatment means nominations that made perfect sense under the old rules may now need complete reconsideration - including the use of bypass trusts or directing benefits via the spouse rather than direct to children.

Review your drawdown strategy. If your estate is likely to exceed the IHT threshold once the pension is included, drawing down pension assets during your lifetime - and deploying that capital through other structures such as lifetime gifting or trust arrangements - may reduce the fund subject to IHT on death. The right answer depends on age, health, income needs and the rest of the estate; there is no one-size formula.

Review your Will. A Will written before these changes were announced may not reflect the most tax-efficient distribution. The interaction between pension, other assets and the distribution set out in your Will now needs to be considered as a single coordinated strategy rather than three separate exercises. Updating your Will is often the first concrete step.

Consider trust arrangements. For estates above the IHT threshold, trust structures can provide significant tax efficiency and - equally important - protection of capital across generations. Trusts are not a loophole; they are a long-established legal structure that needs careful drafting to deliver the intended outcome.

Review jointly held assets. The ownership structure of property and investment assets - tenants in common versus joint tenants, individual versus joint accounts - can affect the IHT position in ways that interact directly with the pension change. Updating Lasting Powers of Attorney alongside these changes ensures the strategy holds up if capacity is lost before death.

Why the window is narrowing

The planning strategies available today are broader than the strategies that will be available after April 2027 - purely because of time. Will updates require careful drafting. Trust arrangements require legal documentation and, in some cases, settlement of assets. Pension restructuring requires considered advice and implementation through providers who are themselves working through the change. None of this can be rushed without real risk of errors that defeat the purpose of the planning.

Families who take advice in 2026 have the full range of options. Families who try to act in early 2027 will have significantly fewer choices and substantially less time to implement them properly. The deadline is fixed; the queue at the front of it is already forming.

How Inheritance Made Simple can help

We work with families across the UK to ensure their estate planning reflects the world as it is, not as it was. The April 2027 pension changes represent the most significant shift in estate planning since the residence nil rate band was introduced. Getting ahead of it matters.

Our approach combines Will writing, trust arrangements, Lasting Powers of Attorney and coordinated financial planning - including specialist input for company directors and for clients with QROPS arrangements - to ensure the estate is structured to deliver maximum benefit to the people you love and the minimum possible to HMRC. See our full guide to inheritance tax planning for context across the wider picture.