2027 Inheritance Tax Changes
Important changes to how Inheritance Tax applies to pensions, taking effect from April 2027.
What is Inheritance Tax?
Inheritance Tax is an estate (property, money and possessions) and certain lifetime gifts tax of someone who has died. Most gifts are only taxable if the transferor dies within seven years of making the gift.
Inheritance Tax is paid on the value of the estate on death, and any gifts made in the seven years before death, above a threshold known as the nil-rate band. The nil-rate band is currently set at £325,000.
There are several further thresholds and exemptions which may be available, including the residence nil-rate band and exemptions for gifts between spouses and civil partners.
What is the exemption between spouses and civil partners?
There is no Inheritance Tax to pay on estates passed to, and gifts between, UK domiciled spouses and civil partners.
What are the Inheritance Tax rates?
The standard Inheritance Tax rate is 40%(but only applies to the part of the estate that's above the nil-rate band).
Depending on when lifetime gifts were made, ‘taper relief’ might mean the Inheritance Tax charged on the gift is less than 40%.
How does Inheritance Tax currently apply to pensions?
Most UK pension schemes allow members to nominate specified beneficiaries, but these are generally not binding nominations. They are simply letters of wishes that record what the member would like to happen to the death benefits. Where pension scheme providers have discretion over the payment of death benefits, and the member could not have created a situation where scheme providers had no discretion, the payment is not treated as part of the estate whether or not any letter of wishes is followed.
What is changing?
From April 2027, most unused pension funds and death benefits will be included within the value of a person's estate for Inheritance Tax.
Why is it changing?
The policy intent is to ensure that pension tax reliefs are being used for their intended purpose – to encourage saving for retirement and later life, rather than to be used as a means so that individuals can accumulate unlimited tax-free savings in their pension, draw on other means to fund their retirement and leave their unused pension assets to be inherited by beneficiaries without any Inheritance Tax charge.
Are there any exemptions?
There are only limited exemptions. Both dependants' scheme pension and charity lump sum death benefits will not be in scope of the changes, so Inheritance Tax will not apply to these types of death benefits.
How will this work in practice?
The proposals, under consultation (which closed on 22 January 2025), propose that where an estate includes different elements (for example, property owned directly, property in a trust, pension scheme death benefits), the available nil-rate band is apportioned between those elements.
The personal representatives for the deceased's estate will be responsible for calculating how the nil-rate band should be apportioned across the different components of the estate including the amount allocated to each pension scheme. A new online calculator from HMRC will be available for this purpose.
Pension Scheme Administrators will be responsible for paying and reporting any Inheritance Tax due to HMRC, taking account of the nil-rate band apportionment advised by the personal representatives for the deceased's estate.
Please note: As with all proposals, these might be subject to change. The final position will be known once the consultation response is issued.
Will the exemption between spouses and civil partners apply to a pension?
Yes, if a pension is passed to a spouse or civil partner on death there is no Inheritance Tax to pay.