From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person’s estate for Inheritance Tax (IHT) purposes. The government states that the changes are needed to combat the practice of pensions being used as vehicles for transferring wealth, rather than the intended use of funding retirement.
Whether this will impact you will depend on the value of your estate (including any relevant pension funds and pension death benefits) and the availability of your IHT allowances.
Yes, the Finance Act 2026 received Royal Assent on 18 March 2026. We are told that further legislation and guidance will be provided, covering information sharing requirements between personal representatives and pension scheme administrators.
The new rules apply to deaths on or after 6 April 2027. Accordingly, the current rules will continue to apply if death occurs before 6th April 2027, even if payment to beneficiaries happens at a later date.
Unused defined contribution pots, drawdown funds remaining at death, and certain lump-sum death benefits will now be included in estate valuations for IHT purposes. The current distinction between discretionary and non-discretionary schemes will be abolished and both types of scheme will be aggregated to the estate value for IHT purposes.
Payments from a scheme to a spouse remain exempt from IHT. The same is true for funds paid to UK charities, annuities and any death in service benefits. Pension funds that also cease on death remain exempt from IHT.
Executors, as appointed via a Will, or Administrators, as per the Intestacy Rules, are liable for reporting and paying the IHT.
If needed, they can instruct pension scheme administrators to withhold up to 50% of the taxable benefits for up to 15 months or direct them to pay the IHT directly to HMRC.
Beneficiaries via the pension scheme will be held jointly liable for any IHT due on the pension and solely liable for IHT due on any pensions schemes that are identified after the administration process has concluded (and clearance received from HMRC). Beneficiaries may need to make choices about how and when IHT should be paid on their benefits.
The RNRB is an additional allowance available when the deceased leaves their home to a direct descendant. The RNRB is currently set at £175,000 and can be transferred after the first spouse passes, if unused.
With unused pension funds and pension death benefits aggregating to estate values, this could impact the availability of the RNRB, should the estate value exceed £2 million. The allowance is tapered away if the total net value of the estate exceeds £2 million. The allowance is reduced by £1 for every £2 that the estate exceeds this, meaning the allowance is lost for estates worth over £2.35 million.
Steps can be taken to avoid losing the RNRB and to mitigate inheritance tax via lifetime tax planning. Porter Dodson will be able to assist in assessing your current IHT profile, advising upon the availability of IHT allowances and the steps that can be taken to preserve your estate.
Our specialists in this area would be happy to help you and your families in readiness for the changes that are due to come into place in April 2027. Please get in touch with our Private Client team.