Pensions to be included for Inheritance Tax
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.
New Rules
With 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 could become subject to both Income Tax and Inheritance Tax (IHT). Unless your pension is left to a spouse, IHT will be charged at the 40% rate on amounts above the available nil-rate band (£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 Income Tax charge on the beneficiary will remain, meaning in certain circumstances both IHT and Income Tax can be charged on the same pension pot.
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.
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 will 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. Investors should review their pension-held property portfolios now, modelling potential IHT exposure and considering whether to switch to a different asset mix.
Key Impacts of the Changes to Consider
- Double taxation risk – Unused pension funds will attract both IHT and Income Tax when beneficiaries withdraw them if the deceased was over 75 and funds pass to someone other than a spouse.
- Estate threshold pressures – Bringing pensions into IHT scope could significantly increase liabilities for estates already above the nil-rate band. The residential nil-rate band is reduced by £1 for every £2 that an estate exceeds £2 million, meaning an effective 60% charge on assets between £2 million and £2.7 million.
- 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
1. Reduce Administrative Burden
If you have more than one pension scheme, consider transferring to consolidate into one. This way your executors will not have the administrative burden of dealing with different scheme administrators.
2. Consider purchasing an annuity
This exchanges capital which will be subject to IHT for a guaranteed income for life. Whilst your annuity may stop when you die, the certainty the annuity provides may give you the confidence to give away other assets during your lifetime.
3. Review your pension estate exposure
Model potential IHT impacts across your pension types (SIPPs, workplace schemes, defined contribution pensions).
4. Update beneficiaries and nominations
Ensure all forms are current and reflect your wishes. Outdated nominations are a common issue.
5. Consider partial drawdowns or gifting
Explore whether drawing from pensions or gifting could sensibly reduce future IHT liabilities.
6. Review trust and legacy planning
Work with your adviser to explore trusts, insurance or hybrid strategies that protect beneficiaries.
7. 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.