The Finance Act 2026, coming into effect from 6 April 202 means that for deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be treated as part of the deceased’s estate for Inheritance Tax (“IHT”) purposes. Deaths before that date remain governed by the existing rules, even if the pension benefits are paid later.
The principal changes are:
- The pension value will be combined with the rest of the estate when applying the nil-rate band, residence nil-rate band, exemptions at the usual 40% rate.
- Personal representatives will report the pension assets and will be primarily liable for any IHT due on it.
- Tax attributable to pension property will normally be due at the end of the sixth month after death, after which interest may accrue as per usual IHT rules
- Qualifying pension death benefits passing to a spouse, civil partner or charity will continue to benefit from the normal IHT exemptions
- Expression-of-wish forms will continue to influence trustees’ selection of beneficiaries, but trustee discretion will no longer itself secure exclusion from IHT.
The reform does not mean that every inherited pension will bear IHT. Liability will still depend on the combined estate, available nil-rate bands, transferable allowances, exemptions and reliefs. In appropriate circumstances, a married couple or civil partners may pass up to £1 million without IHT where the full standard and residence nil-rate bands are available.
