HMRC has published a detailed technical note confirming how pensions inheritance tax from April 2027 will work in practice. Released on 11 May 2026, it spells out new withholding powers, a direct payment scheme, and information-sharing rules for pension schemes and families.
In brief:
- Most unused DC pension pots, drawdown funds, and certain defined benefit death benefits come into scope of IHT for deaths on or after 6 April 2027.
- IHT nil-rate band: £325,000 (frozen since 2009), with a combined threshold of up to £1,000,000 for couples passing on a family home to direct descendants.
- IHT is charged at 40% above the threshold — or 36% where at least 10% of the net estate goes to a UK charity.
- HMRC says more than 90% of estates each year won’t pay any inheritance tax after these changes, though around 10,500 additional estates could face a liability annually.
Why pensions are being brought into the IHT net
Put simply, the government wants to stop pension schemes being used as a tax-free vehicle to pass wealth between generations.
Under current rules, unspent DC pension pots sit outside the estate entirely. That’s made them one of the most popular inheritance tax planning tools available. HMRC’s technical note confirms that’s about to change.
Legislated through the Finance Act 2026, which received Royal Assent on 18 March 2026, this pensions inheritance tax reform brings most unused pension funds and pension death benefits into the deceased’s estate.
It applies only to deaths on or after 6 April 2027. If a pension scheme member dies before that date, current rules apply — even if benefits aren’t paid to beneficiaries until afterwards.
This isn’t a blanket sweep of every pension payment, though. Death in service benefits remain excluded, regardless of whether they’re paid as a lump sum or pension income.
Dependants’ scheme pensions — ongoing payments to a surviving spouse, civil partner, child, or financial dependant — are also outside the scope. Joint life annuities purchased alongside a member’s lifetime annuity stay exempt too.
Transfers to a surviving spouse or civil partner who’s a long-term UK resident remain protected by the existing spousal exemption.
What the pensions inheritance tax note reveals
Most of the real substance in the 11 May publication is operational detail. HMRC has spelled out how pension IHT changes 2027 will actually work for the people who have to deal with them.
A new withholding mechanism, created under section 226A of the Inheritance Tax Act 1984, gives personal representatives the power to instruct pension scheme administrators to hold back up to 50% of a beneficiary’s entitlement.
This pension IHT withholding notice can be issued at any time between the date of death and 15 months after the end of the month of death.
It’s not designed for routine use. HMRC’s note makes clear it should only be used where the personal representative knows or reasonably believes IHT may be due. Scheme administrators must acknowledge receipt within 14 days, and beneficiaries should still be able to access the remaining 50% promptly.
Here’s the catch: if a scheme administrator fails to act on a valid notice, they become jointly and severally liable for the IHT. That’s a significant new compliance risk.
Alongside the withholding power sits the new Pensions Direct Payment Scheme (section 226B IHTA 1984).
This lets personal representatives or beneficiaries issue a payment notice requiring the scheme administrator to pay IHT directly to HMRC from the pension fund. Notices must be for at least £1,000 and for an exact amount, with 35 days to pay.
Using this pensions direct payment scheme IHT route reduces the benefits payable to the beneficiary, so income tax is then charged only on the amount net of IHT — preventing double taxation. It’s optional. Beneficiaries can still pay from non-pension funds if they prefer.
What families need to do
Bereaved families face a considerable practical burden. Personal representatives are responsible for tracking down every pension scheme a deceased person held. That means going through papers, bank statements, and correspondence, and speaking to relatives, advisers, and former employers.
Each pension scheme administrator must provide the value of notional pension property within 28 days of receiving the request. If a final valuation isn’t available, an estimated value must be supplied, with the final figure following within 14 days once it’s ready.
Once all valuations are in, the personal representative combines them with the rest of the estate and uses a new online HMRC tool to calculate the inheritance tax on pensions UK liability. IHT is due at the end of the sixth month after death. Late payment interest accrues after that point.
Some reliefs that apply to other estate assets don’t extend to pension property. Loss on sale relief, Business Property Relief, and Agricultural Property Relief all fall outside scope. Payment by instalments over 10 years isn’t available for pension assets either.
Income tax treatment depends on the member’s age at death. If they died before 75, lump sum pension death benefits IHT liabilities are typically income tax-free, subject to the lump sum and death benefit allowance.
If they died at 75 or over, all death benefits are taxable at the beneficiary’s marginal rate. Where IHT has been paid on unused pension funds inheritance tax liabilities, the portion corresponding to IHT doesn’t count towards the beneficiary’s taxable income.
It’s also worth noting that pension funds held in qualifying non-UK pension schemes and section 615(3) schemes are in scope for the pensions inheritance tax April 2027 changes.
Personal representatives will need to obtain valuations from these schemes too, although the withholding and direct payment mechanisms don’t apply to them.
Industry warns time is running out
HMRC’s own timetable shows draft regulations on information sharing are due in spring 2026, with regulations to be laid by summer 2026. Draft guidance won’t reach industry stakeholders until autumn or winter 2026/2027. Final guidance is pencilled in for spring 2027 — just weeks before the 6 April go-live date.
Tim Camfield, Principal at pension consultancy LCP, welcomed parts of the HMRC pension inheritance tax technical note but raised serious concerns about the timetable.
He said: “There is helpful clarity here for bereaved families that half of the pension should generally be able to be paid out quickly.”
He went on to warn: “We have concerns about the impact of further guidance being issued in spring 2027, just weeks before actual cases begin to arise. HMRC’s consultative approach is welcome, but time is running out for HMRC to give schemes the detailed information which they will need to implement a new system which starts in less than a year’s time.”
Meanwhile, the government has committed £52 million to digitalise the IHT service from the 2027 to 2028 tax year onwards. That investment is meant to fund the new online tools personal representatives will rely on. Whether those tools are ready in time remains an open question.
Could you be owed an IHT rebate?
If you’ve already dealt with a DC pension inheritance tax liability, or you’re expecting to after April 2027, it’s worth checking whether the estate is using every available allowance. Nil-rate band, residence nil-rate band, spousal exemption, and charity rate reduction can all reduce or eliminate the bill — but only if they’re correctly claimed.
If you think you may have overpaid tax on an estate, or you’re unsure whether a pension death benefit should have been taxed, it’s worth reviewing the position. Our inheritance tax guide explains the main allowances and how to check if a claim might apply.
Steps to take now
- Check whether the deceased held any DC pension pots, drawdown funds, or money purchase death benefits that could now fall within scope.
- Contact each pension scheme administrator to request a date-of-death valuation and confirm whether any benefits are excluded.
- Calculate the combined estate value including pension property, and check whether the nil-rate band, residence nil-rate band, or spousal exemption thresholds apply.
Key Takeaways
- From 6 April 2027, most unused pension funds and pension death benefits count towards your estate for IHT purposes — but death in service benefits, dependants’ scheme pensions, and spousal transfers remain exempt.
- Personal representatives can instruct pension schemes to withhold up to 50% of benefits and can use the new Pensions Direct Payment Scheme to pay IHT directly from the fund.
- You’ll need to track down every pension the deceased held, request valuations within 28 days, and pay any IHT due within six months of death.
- Standard IHT nil-rate band: £325,000, rising to a combined £1,000,000 for couples leaving a home to direct descendants. IHT is charged at 40% (or 36% for charitable estates) above those thresholds.
- HMRC’s final guidance isn’t expected until spring 2027, leaving pension schemes with limited time to prepare for a system that could affect around 10,500 additional estates each year.
