Inheritance tax on pensions from April 2027 — what sellers should know

Written and reviewed by the South Yorkshire Property Buyers team (a trading name of Bullseye Properties Ltd, company 14869608, previously Lord CNB Properties Ltd until 18 April 2024). Published 31 May 2026. Last reviewed: 2 June 2026.

What changed at the Autumn Budget 2025

The 2024 Autumn Budget first announced the policy intention: from 6 April 2027, most unused pension funds and pension death benefits would be brought within the value of a deceased person's estate for inheritance tax. A technical consultation ran through 2025. The Autumn Budget 2025 then confirmed the design, the timing and the administrative model — with draft legislation published by HMRC alongside the Budget.

Three things are now settled in policy terms:

• Start date: the change applies to deaths on or after 6 April 2027. Estates of people who die before that date are dealt with under the old pre-2027 treatment of pensions.
• Scope: most unused defined contribution pension pots and the lump sum and dependant death benefits paid from registered pension schemes will count towards the estate. There are limited exceptions, including for spouse and civil partner transfers (which remain spouse-exempt) and certain death-in-service arrangements.
• Administration: after consultation, personal representatives (executors and administrators) — not pension scheme administrators — will be responsible for reporting the value of pension funds to HMRC and for paying any inheritance tax due. Pension schemes will provide valuations and pay tax due to HMRC from the fund where the beneficiary requests it.

The change does not raise the rate of inheritance tax. It does not introduce new thresholds. What it does is bring a large pool of household wealth — UK defined contribution pension assets — inside the existing IHT framework for the first time. The most recent ONS Wealth and Assets Survey figures show private pension wealth is the single largest component of household wealth in Great Britain, ahead of property — which gives a sense of the policy's reach.

"This is the biggest structural change to inheritance tax since the residence nil-rate band was introduced in 2017. For families whose wealth sits in a home plus a defined contribution pension, the combined estate value will look very different from 6 April 2027 onwards."

Why pensions were outside IHT — and why that mattered

For most of the modern pensions era, unspent defined contribution (DC) pension pots have been treated as outside the deceased's estate for inheritance tax. The legal architecture sat in a discretionary trust structure: pension scheme trustees had discretion over who received any death benefits, and because the deceased did not have an absolute legal right to direct that money, it did not form part of their estate under section 5 of the Inheritance Tax Act 1984.

That treatment was tightened further when the so-called "pension freedoms" came in from April 2015. From that point, unused DC pension funds could be passed to chosen beneficiaries tax-free where the saver died before age 75, and at the beneficiary's marginal income tax rate where the saver died at age 75 or older. Combined with the IHT exclusion, the pension became an unusually efficient vehicle for passing wealth to children and grandchildren.

The result, flagged in successive reviews by the Office of Tax Simplification and by independent think tanks including the Institute for Fiscal Studies, was a behavioural shift: wealthy savers increasingly drew down on ISAs, general investment accounts and even property equity in retirement while leaving the DC pension untouched as an inheritance-efficient asset. The 2024 consultation document was explicit that the policy intent of pensions was retirement income, not estate planning, and that the IHT exclusion had drifted from that intent.

The April 2027 change closes that route. It does not retroactively tax anything — pensions paid on deaths before 6 April 2027 continue to be treated under the old rules — but from that date the planning landscape changes materially.

What the 2026 IHT thresholds look like

Inheritance tax in 2026 is charged at 40% on the value of an estate above the available nil-rate bands. The thresholds, confirmed at the Autumn Budget 2024 and unchanged at Autumn Budget 2025, are:

Threshold	Amount	Frozen until
Nil-rate band (NRB)	£325,000	5 April 2031
Residence nil-rate band (RNRB)	£175,000	5 April 2031
Combined max for one person	£500,000	5 April 2031
Combined max for a married couple / civil partners	£1,000,000	5 April 2031

The residence nil-rate band only applies where the deceased leaves a qualifying residence to direct descendants (children, grandchildren, including step and adopted), and is tapered for estates over £2 million at £1 of RNRB lost for every £2 of estate value over that threshold. The bands have been frozen since 2021 and, with the latest extension, will remain frozen for a full decade — a real-terms cut as house prices and pension values rise.

The combined effect: a worked example

To make the change concrete, consider a fairly typical estate in 2027 in South Yorkshire:

• A widow in Sheffield, age 78, passes away on 1 May 2027.
• Her late husband died in 2020 having left everything to her. He used none of his £325,000 NRB or £175,000 RNRB, so both transfer to her estate.
• Her house in S11 is worth £450,000 at the date of death.
• Her ISA holdings total £80,000.
• Her defined contribution pension drawdown account, never accessed, holds £220,000.

Under the pre-2027 rules the estate for IHT would have been the house plus the ISA — £530,000 — against £1m of combined nil-rate bands. No IHT due. The £220,000 pension would have passed to her adult children outside the estate, taxed only at the children's marginal income tax rate on drawdown because she was over 75.

From 6 April 2027 the same estate becomes £450,000 + £80,000 + £220,000 = £750,000. Still under the £1m combined NRB and RNRB, so still no IHT due in this example. But the picture is now much closer to the threshold, and a modest rise in the house value or the pension pot is what tips the estate into IHT territory.

That is the practical reality of the change for households with both a home and a DC pension: it is not necessarily a tax bill where none existed, but it is a much closer margin, and the frozen thresholds mean that margin tightens every year. Families who would not have thought of themselves as "IHT estates" before will find themselves on the wrong side of the line as time passes.

Why this matters for property decisions

1. Property is usually the asset that funds the IHT bill

Inheritance tax is due within six months of the end of the month of death (section 226, Inheritance Tax Act 1984). For estates where most of the value sits in the home plus a DC pension, the liquid cash available to pay HMRC is often limited. Beneficiaries typically face one of three routes: an "IHT direct payment scheme" via the deceased's bank accounts (limited by available balance), a loan against the estate, or a sale of estate assets.

The pension itself can be used to settle the tax under the new arrangement: HMRC has confirmed that pension scheme administrators will pay IHT due on the pension portion of the estate directly to HMRC where the beneficiary asks, with the deduction made from the fund. But where the pension is not large enough to cover the full bill, or where the beneficiaries want to preserve the pension and sell the property, the timing pressure on the property sale becomes acute.

This is the practical reason executors increasingly look at a fast cash sale of the family home. With a cash buyer, you can agree heads of terms during the probate process and complete within days of the Grant being issued — comfortably inside the six-month IHT window. With a chain-dependent open-market buyer, four to six months from instruction to completion is normal, and that does not start until the Grant is in hand.

2. Executors now face a longer information-gathering period

From 6 April 2027, executors will need to identify all of the deceased's pension arrangements, request valuations as at the date of death from each scheme administrator, and include those figures in the IHT account before the Grant of Probate can be issued. HMRC's technical guidance sets out a process model in which pension scheme administrators must provide values within a fixed period of being asked.

For estates with multiple pensions (a workplace DC pot, a SIPP, an old personal pension), this adds time. The latest HMCTS Family Court Statistics already show a mean wait of 5 weeks and a median of 2 weeks for digital, non-stopped probate applications. From 2027, executors should plan for longer information-gathering before the probate application can even be submitted.

3. Estate planning for owner-occupiers shifts

For owner-occupiers in their 50s and 60s — especially those who have built up DC pension assets through automatic enrolment and consolidation over the last fifteen years — the planning calculus changes. Strategies that previously prioritised preserving the pension and drawing first on other assets in retirement now need to be reviewed in light of the post-2027 treatment. Decisions about downsizing, gifting the family home or releasing equity through later-life lending may all look different once the pension is in the IHT picture.

This is not a do-it-yourself area. HMRC's IHT guidance is detailed but inevitably general; the right answer for any household depends on income needs, family circumstances, and the size and structure of the pension pots. A regulated independent financial adviser plus a STEP-qualified solicitor remain the right combination for estate planning advice.

Act now or wait? The framing for executors

Three different groups face slightly different questions in 2026 and into 2027.

Executors with a current estate (death before 6 April 2027)

The pre-2027 rules apply. Pensions remain outside the estate. The job is to confirm whether IHT is due on the estate as it stands, file the IHT account if required, obtain the Grant of Probate, and deal with any property sale in the usual way. For step-by-step guidance see our probate property sale page and our blog selling a house during probate in South Yorkshire.

Executors with a death on or after 6 April 2027

The new rules apply. Identifying pensions and obtaining date-of-death valuations is part of the IHT account. The IHT bill on the pension portion of the estate can be settled from the pension itself, but executors should think carefully about whether to take that route or fund the IHT bill from elsewhere — including a property sale — depending on the beneficiaries' tax position and the relative liquidity of the estate's assets.

Owner-occupiers thinking ahead

For households expecting to leave behind both a home and a meaningful DC pension, 2026 is the year to take advice. The change is fixed in legislation now, but the planning options — gifting, life cover written in trust, drawdown strategy, downsizing — all have lead times. The frozen thresholds mean that every year between now and April 2031 brings more estates into IHT scope at the margin.

How a cash buyer fits in

South Yorkshire Property Buyers is not an estate planning firm and does not give tax advice. What we do is buy houses for cash across South Yorkshire and the East Midlands, often from executors, often during probate, and often where the speed of completion matters more than achieving the absolute top of the open-market range.

For estates where the inheritance tax bill needs to be funded within six months of death, where the property is empty and accruing holding costs, or where multiple beneficiaries want a clean resolution rather than a drawn-out sales process, the cash route offers a different trade-off: a price typically at 80–85% of full market value, in return for a timeline measured in weeks rather than months and no fall-through risk. For more detail on how it works see how it works and cash buyer vs estate agent.

Inheritance tax on pensions: FAQs