Inheritance Tax and Pensions: The April 2027 Change Explained

For many families, a pension has long been one of the most tax-efficient ways to pass on wealth. That is about to change. From 6 April 2027, most unused pension funds and pension death benefits will be treated as part of your estate for Inheritance Tax. HM Revenue and Customs (HMRC) has now published a technical note explaining how the new rules will work in practice, and it places fresh responsibilities on the families and executors left to deal with an estate.

If you live in Chesterfield, Sheffield or the surrounding area and you hope to pass a pension on to your loved ones, this is a change worth understanding well before it takes effect. Below we explain what is changing, what is staying the same, and the steps you can take now to plan.

The main points at a glance

From 6 April 2027, most unused pension funds and death benefits will count towards your estate for Inheritance Tax.
The change was made law by the Finance Act 2026 and applies to deaths on or after that date.
Pensions left to a spouse or civil partner, and death-in-service benefits, remain outside the scope of the tax.
Your personal representatives (the people who deal with your estate) will be responsible for reporting and paying any tax due.
More than 90% of estates are still expected to pay no Inheritance Tax at all.

What is changing for pensions and Inheritance Tax from April 2027?

From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of your estate when Inheritance Tax is calculated. This is a major shift. Until now, most pensions have sat outside the estate, which is one reason they have often been used to pass wealth to the next generation.

The change was introduced by the Finance Act 2026, which received Royal Assent on 18 March 2026, and it applies to deaths on or after 6 April 2027. The government’s stated aim is to stop pensions being used mainly as a way of reducing Inheritance Tax.

What is staying the same?

Not every pension will be caught, and several long-standing protections remain in place:

Pensions passing to a spouse or civil partner stay exempt from Inheritance Tax, as they do now.
Gifts and pension funds left to a registered charity remain exempt.
Death in service benefits paid from a registered pension scheme will be excluded from your estate.

It is also worth keeping the change in perspective. HMRC expects that more than 90% of estates will continue to pay no Inheritance Tax.

Who will be responsible for reporting and paying the tax?

Your personal representatives, meaning your executors, or administrators if there is no Will, will be responsible for reporting the pension and paying any Inheritance Tax due on it. HMRC’s technical note, published on 11 May 2026, sets out how this will work.

In practice, the people dealing with your estate will need to take reasonable steps to identify all of your pensions, obtain their values, and include them in the estate. To help with this:

Personal representatives or the pension beneficiaries can ask the pension scheme to pay the Inheritance Tax due directly to HMRC.
Personal representatives can direct a scheme to hold back up to 50% of the taxable benefits for a period while the tax position is settled.

There are strict time limits. Interest can begin to run on unpaid Inheritance Tax from six months after the end of the month of death, and penalties can apply after twelve months. Because pensions are often held with several different providers, tracing them and gathering valuations can take time, which is why planning matters.

What is the Inheritance Tax threshold in 2026/27?

Inheritance Tax is normally charged at 40% on the value of an estate above the tax-free threshold. The main allowances for the 2026/27 tax year are:

The nil rate band: the first £325,000 of an estate is taxed at 0%.
The residence nil rate band: a further £175,000 where a main home is passed to children, grandchildren or other direct descendants.

Together, these can allow one person to pass on up to £500,000 tax-free. Any unused allowance can usually be transferred to a surviving spouse or civil partner, so a married couple or civil partners can potentially pass on up to £1 million between them.

The nil rate band has been frozen at £325,000 since 2009 and, following the Autumn Budget 2025, is currently set to remain frozen until April 2031. The residence nil rate band is also reduced for larger estates: it tapers away by £1 for every £2 by which the estate exceeds £2 million. If you leave at least 10% of your net estate to charity, the rate on the remainder falls from 40% to 36%.

How can I reduce Inheritance Tax on my estate?

There are several legal ways to reduce the Inheritance Tax your estate may face, and with pensions being brought into scope from 2027, it is a sensible time to review your plans. Common approaches include making a valid, up-to-date Will, leaving assets to a spouse, civil partner or charity, and making use of lifetime gifts.

Lifetime gifting is one of the most widely used tools. As a general rule, if you make a gift and survive for seven years, it falls outside your estate for Inheritance Tax. This is often called the seven-year rule. Gifts of this kind are known as potentially exempt transfers: they become fully exempt if you live for seven years after making them.

If you die within seven years, the gift may be considered. Taper relief can reduce the rate of tax on gifts made between three and seven years before death, but it only applies to the part of your gifts that exceeds the nil rate band, and it reduces the rate of tax rather than the value of the gift itself. This is a common point of confusion, so it is worth taking advice before making substantial gifts.

Our estate planning solicitors can advise on the gifting of assets and help you understand the implications, including the separate rules on care costs and deprivation of assets. Because a pension is a regulated financial product, you should also take advice from an Independent Financial Adviser (IFA) before making decisions about the pension itself.

What gifts are exempt from Inheritance Tax?

Several gifts are exempt from Inheritance Tax straight away, without needing to survive the seven years. These include:

Annual exemption: you can give away up to £3,000 in total each tax year. If you do not use it, you can carry it forward for one year only.
Small gifts: you can give up to £250 to as many individuals as you like each year, provided they have not benefited from your annual exemption.
Wedding or civil partnership gifts: up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.
Regular gifts out of income: gifts made from your surplus income that do not affect your normal standard of living can be exempt.
Gifts to a spouse or civil partner, and to registered charities: these are generally exempt without limit.

Keeping a clear record of any gifts you make will make life much easier for your personal representatives later on.

What should you do now?

The change does not take effect until April 2027, which gives you time to plan. Sensible first steps include:

Reviewing your Will to make sure it still reflects your wishes and takes account of the new rules.
Considering whether lifetime gifting forms part of your plans and taking advice on the seven-year rule.
Speaking to an Independent Financial Adviser about your pension, and to a solicitor about your wider estate.

How Buchanan & Co can help

Our estate planning team in Chesterfield and Sheffield can help you put your affairs in order, from preparing or updating your Will to advising on the gifting of assets and trusts. We also support executors and personal representatives through the probate and estate administration process, including the additional work the new pension rules will bring.

Rated ‘Excellent’ on ReviewSolicitors with 620+ client reviews, one recent client left this feedback on our Estate Planning legal services:

“Alex gave me reassurance and time to talk, also his colleague on my follow up apt was very professional and empathetic. My future is now secure knowing my son is secure in his”.

To talk through what the April 2027 changes mean for you and your family, contact our estate planning team on 01246 471900 (Chesterfield) or 01909 510751 (Sheffield), or get in touch through our website.

Frequently asked questions

How can I reduce Inheritance Tax liability on my estate?

You can reduce a potential Inheritance Tax bill by making a valid Will, leaving assets to a spouse, civil partner or charity, and using lifetime gifts and allowances such as the £3,000 annual exemption. Larger gifts generally fall outside your estate if you survive for seven years. A solicitor can help you plan, and an Independent Financial Adviser can advise on any pension decisions.

What gifts are exempt from UK Inheritance Tax?

Exempt gifts include up to £3,000 each tax year (the annual exemption), small gifts of up to £250 per person, wedding gifts of up to £5,000 to a child, and regular gifts made out of surplus income. Gifts to a spouse, civil partner or registered charity are also generally exempt. Larger gifts to individuals become exempt if you survive for seven years.

What is the Inheritance Tax threshold?

For the 2026/27 tax year, the nil rate band is £325,000, meaning no Inheritance Tax is due below this amount. A further residence nil rate band of £175,000 can apply when a main home passes to direct descendants, allowing one person to pass on up to £500,000, or up to £1 million for a couple. Inheritance Tax is charged at 40% above the threshold.

Important note: This article is for general information only and is correct as at its date of publication. It does not constitute legal, tax or financial advice and should not be relied upon as such. Inheritance Tax and pension rules are complex and subject to change, and HMRC is continuing to publish guidance ahead of April 2027. For advice on your own circumstances, please get in touch with our estate planning team. Decisions about your pension should be taken with a regulated Independent Financial Adviser. Buchanan & Co is authorised and regulated by the Solicitors Regulation Authority.