Are Pensions Forming Part of IHT in 2027?
A major shift is coming. From 6 April 2027, unused pension funds and death benefits will, in most cases, fall within the scope of Inheritance Tax (IHT).
This change ends a decades-long tax advantage where pension pots largely escaped the IHT net, transforming pensions from a discreet estate-planning tool into a core part of inheritance planning strategy.
What’s changing
Under the new rules, the personal representatives (executors) of an estate will be responsible for reporting and paying any IHT due on unused pension wealth.
Originally, the government had proposed making pension scheme administrators responsible for this, but after consultation, the duty will remain with executors – adding a new layer of responsibility for families and advisers to plan for.
Also, under the new rules taking effect from April 2027, the tax treatment of defined contribution (DC) pension funds will change significantly. Any funds that remain untouched at the time of death will become subject to both Income Tax and Inheritance Tax (IHT) – with IHT charged at the 40% rate on amounts above the available nil-rate band (on estates worth more than £325,000, or £500,000 if your home is left to children or grandchildren).
At present, untouched DC pension funds can usually be passed to beneficiaries tax-free if death occurs before age 75, or with Income Tax payable at the beneficiary’s marginal rate if the pension holder dies after 75. This reform effectively removes one of the key tax advantages that made pensions a highly efficient vehicle for passing on wealth.
How the changes impact property assets held in pensions
The proposed 2027 changes to Inheritance Tax (IHT) treatment for pensions are expected to extend to all assets within defined contribution pension schemes, including commercial property held inside Self-Invested Personal Pensions (SIPPs).
Under the new regime, if property remains inside the SIPP at the pension holder’s death – and has not been crystallised or drawn down – it will likely be treated as part of the unused pension fund. This means it could become subject to IHT at 40% (on values above the nil-rate band), in addition to any Income Tax that might apply when beneficiaries realise or draw on the asset’s value.
Currently, such property can usually be passed to beneficiaries outside the IHT net (subject only to Income Tax if the holder dies after age 75). The reform therefore removes one of the major intergenerational advantages of holding property within a SIPP structure.
The consequences of this for commercial property ownership within a SIPP could also be highly complex where an inheritance tax payment is due and a commercial property would potentially have to be sold within the 60 day window to realise the funds to make the tax payment compliantly.
In practical terms, this means:
- Estate exposure increases: The value of SIPP-held property may now contribute to overall IHT liability.
- Liquidity becomes critical: Because property is illiquid, executors could face challenges paying IHT if the property cannot be easily sold or transferred.
- Strategic planning is needed: Some clients may consider partial sales, diversification, or restructuring (for example, moving rental income out of the SIPP earlier, or reviewing the ownership structure) to mitigate risk.
In short, property in SIPPs will no longer enjoy the same estate-planning benefits it once did. High-net-worth investors should review their pension-held property portfolios now, modelling potential IHT exposure and considering whether to rebalance or extract value before 2027.
Key Impacts of the Changes to Consider
- Double taxation risk – Unused pension funds may attract both IHT and income tax when beneficiaries withdraw them, especially if the deceased was over 75.
- Estate threshold pressures – Bringing pensions into IHT scope could significantly increase liabilities for estates already above the nil-rate band.
- Nomination and trust structuring – Keeping your pension “expression of wish” up to date and reviewing trust options is now essential.
- Timing matters – Drawing down or restructuring pension funds before 2027 could reduce exposure, but must be weighed carefully against income tax and future needs.
What you should be doing now
- Review your pension estate exposure
Model potential IHT impacts across your pension types (SIPPs, workplace schemes, defined contribution pensions). - Update beneficiaries and nominations
Ensure all forms are current and reflect your wishes – outdated nominations are a common issue. - Consider partial drawdowns or gifting
Explore whether drawing from pensions or gifting could sensibly reduce future IHT liabilities. - Review trust and legacy planning
Work with your adviser to explore trusts, insurance, or hybrid strategies that protect beneficiaries. - Plan for executor obligations
Ensure your estate has sufficient liquidity to cover future IHT liabilities – without forcing asset sales.
A final word
The 2027 reforms mark one of the most significant shifts in UK pension taxation for decades. For individuals with considerable pension wealth, they blur the lines between retirement strategy and estate planning.
At Herbert Scott, our role is to help you navigate these changes with clarity and confidence – ensuring your finances work for you now, and for the generations to come. Bring this change up with your adviser at Herbert Scott at your next review.
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This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.