HMRC has confirmed forthcoming changes to the inheritance tax treatment of pensions, following the enactment of the Finance Act 2026. The changes, which will apply to deaths on or after 6 April 2027, are described as "amongst the most significant developments in private wealth".
Impact on Estates
According to Government calculations, the changes are forecast to impact 10,500 more estates paying IHT in its first year of inception. The average IHT liability is expected to increase by around £34,000.
What Will Be Affected
Broadly, most unused pension funds and pension death benefits will be treated as forming part of a deceased's estate for IHT purposes. This is expected to include unused defined contribution pension funds, drawdown funds remaining at death, certain lump sum death benefits, and some overseas pension arrangements. Importantly, the new rules will apply regardless of whether pension trustees retain discretionary powers over death benefits.
Exemptions
Certain benefits will remain outside the IHT regime, including transfers to spouses and civil partners, dependants' scheme pensions, genuine death-in-service benefits, certain joint life annuity arrangements, and transfers to charitable beneficiaries.
Business and Agricultural Property Relief
HMRC has also confirmed that business property relief (BPR) and agricultural property relief (APR) will not apply to pension funds on the basis that 'notional pension property is neither relevant business property, nor agricultural property' and therefore the member is not treated as owning the pension's assets.
Need for Review
Although the new rules do not take effect until April 2027, the publication of HMRC's guidance is an important reminder that individuals with pension wealth should consider reviewing their existing estate planning arrangements sooner rather than later.
For many people, pensions currently form a substantial part of their overall wealth. These changes may therefore have a material impact not only on potential IHT exposure, but also on liquidity, estate administration and the practical burden placed on family members after death.
There is also likely to be increased focus on the interaction between IHT and income tax, particularly where beneficiaries may ultimately face both charges in relation to inherited pension funds.
Timeline
The new rules will apply to deaths occurring on or after 6 April 2027. Further draft regulations and HMRC guidance are expected throughout 2026, with final operational guidance anticipated in spring 2027.
