Pensions and Inheritance Tax from April 2027: DC Pension IHT Reform, Double Taxation, and Pre-2027 Planning (2026)
From 6 April 2027, undrawn DC pension funds enter the IHT estate. Currently a pension of any size passes IHT-free — from next April, a £500k SIPP could mean £200k in IHT. The time to plan is now.
| Scenario | Before April 2027 (Current) | From April 2027 (Reformed) | Planning Notes |
|---|---|---|---|
| DC pension in drawdown — £500k SIPP; dies before April 2027 | £0 IHT on pension. Pension outside estate. Nominee (spouse or children) inherits £500k (pre-2027 rules). If death before 75: income tax-free withdrawal for beneficiaries. If death after 75: beneficiary pays income tax at marginal rate on withdrawals from inherited drawdown | £500k pension enters estate. IHT at 40% on £500k (minus any available NRB/RNRB covering other estate): if NRB and RNRB already used by rest of estate, IHT on pension = 40% × £500k = £200k. Beneficiary receives £300k in inherited drawdown. Beneficiary withdraws and pays income tax: 20-45% income tax on the £300k. Total tax potentially £200k IHT + £60k-£135k income tax = 52-67% combined rate | Huge change for those with significant DC pensions. Pre-April 2027 drawdown + reinvestment may save substantial IHT |
| DC pension passed to spouse — £800k SIPP — spouse nominee | Outside estate; no IHT; spouse inherits £800k via drawdown or lump sum. If death before 75: income tax-free for spouse. | Government proposed IHT spousal exemption on pension element passing to spouse (not yet enacted as of June 2026). If exemption enacted: pension to spouse = £0 IHT (similar to s18 IHTA spousal exemption on other assets). If NO exemption: IHT on £800k pension (less NRB available) = potentially £190k IHT. Spouse receives £610k inherited drawdown; income tax on withdrawals. RNRB taper: pension in estate for taper purposes (s8F IHTA — adjusted net estate) if spousal exemption doesn't apply | Monitor legislation. Final rules expected by late 2026 / early 2027 before implementation. |
| Pre-2027 action: pension drawdown + AIM BPR reinvestment | N/A — action taken pre-reform | Withdraw £200k from SIPP now; pay income tax at marginal rate (e.g., 40% = £80k tax; £120k net). Invest £120k in directly held AIM BPR shares (not in ISA). After 2yr minimum holding (s106 IHTA): £120k AIM shares = 100% BPR (no IHT, up to £1m combined BPR/APR cap). Pre-reform pension = IHT on £200k = £80k. Post-drawdown + BPR: IHT = £0 on AIM shares (after 2yr). Saving: £80k IHT (offset partly by income tax paid on drawdown — net saving depends on income tax rate) | Most effective for basic/lower rate taxpayers (less income tax on drawdown) or those with AIM holdings already partially established (shorter remaining wait for 2yr BPR) |
| s21 IHTA normal expenditure from income — pension income surplus to needs | Currently: pension income not in estate; gifts from pension income s21 exempt (uncapped, immediate). Very efficient | From April 2027: pension still in estate on death (undrawn portion). BUT: pension income DRAWN and immediately given away under s21 (regular gifts from income; not from capital; normal pattern; no diminution to standard of living) = immediately IHT exempt (s21 IHTA 1984). The drawn income is spent — not in the pension pot on death — so escapes the April 2027 pension IHT. This is the most IHT-efficient pension strategy if the pensioner has surplus income: draw and gift under s21 | s21 IHTA conditions: habitual (normal expenditure); from income (not capital); no diminution in standard of living. Record-keeping essential — IHT403 form for gifts; must show pattern of giving. |
| Pension nomination — updating after April 2027 | Nomination form (expression of wishes) determines who gets the full pre-tax pension death benefit. Pension trustees use it as a guide (not binding). Update after divorce, death of original nominee, birth of grandchildren | From April 2027: nomination determines who gets the NET (post-IHT) pension death benefit. The pension trustee pays IHT first. Review nominations to ensure: (a) spouse nominee may benefit from spousal exemption (if enacted); (b) family members who are higher-rate taxpayers may incur more income tax on inherited drawdown; (c) leaving pension to a charity: charitable exemption (s23 IHTA) should apply — pension to charity = IHT-exempt + income tax-free for the charity. Update nominations NOW — many investors have outdated nominations (naming ex-spouses, deceased parents, or no nomination at all) | Do NOT nominate 'my estate' — this drags pension into estate for both IHT and probate (losing discretionary trust protection). Name individuals or a trust. |
| Annuity vs drawdown — IHT comparison from April 2027 | Currently: drawdown = outside estate (no IHT); annuity = no residual fund on death (no IHT issue; income stops or reduces to spouse's annuity). Both IHT-neutral currently | From April 2027: drawdown = IHT on undrawn fund at 40%. Annuity = no IHT issue (no residual fund; the 'pot' is consumed in lifetime annuity payments; nothing left for IHT). The annuity vs drawdown comparison changes: drawdown faces new IHT cost; annuity avoids it. For older pension savers with large DC pots: annuity may be more IHT-efficient from April 2027, even if the total annuity payments over lifetime are less than the drawdown fund value. Spouse's annuity: a joint life annuity that continues to a spouse on death also avoids the IHT issue | The annuity decision should not be driven solely by IHT — longevity, investment returns, flexibility all matter. Take specialist pension and IHT advice. |
DC pension IHT reform: Finance Act 2024 (Autumn Budget 2024); implementation 6 April 2027. DC pensions in scope: SIPPs, personal pensions, workplace money purchase. DB pensions: separate rules under development. Currently (pre-April 2027): DC pensions outside IHT estate — held in trust by pension provider/trustees; paid at trustees' discretion; no s5(1) IHTA beneficial entitlement. From April 2027: undrawn pension fund in IHT estate; pension trustees calculate/pay IHT to HMRC; net benefit to nominees. Double taxation: IHT 40% on pension fund; income tax on inherited drawdown withdrawals at beneficiary's marginal rate; government has acknowledged and is developing credit/reduction mechanism; pending final legislation June 2026. Spousal exemption on pension: proposed but not yet enacted as of June 2026. Pre-2027 planning: drawdown + AIM BPR (s105(1)(bb) IHTA; direct holding; 2yr minimum; £1m combined BPR/APR cap from April 2026); s21 IHTA normal expenditure from income (uncapped; immediate; habitual; from income not capital; no diminution in standard of living); PETs (s3A IHTA; 7yr clock); update nomination forms (do NOT nominate estate). Charitable nomination: s23 IHTA charitable exemption should apply to pension passing to charity. Annuity: no residual fund = no IHT from April 2027; but income stops (or reduces to spouse's pension) on death. State pension: unaffected (income stream; no pot).
Pension IHT April 2027: Complete Guide
The current position — DC pensions are outside the IHT estate until April 2027
Until 5 April 2027, defined contribution (DC) pension death benefits are entirely outside the IHT estate. The mechanism: DC pensions are held in trust by the pension scheme (the provider or trustees). The pension does not form part of the member's estate on death — it is the trustees' asset, paid at their discretion to the nominees. Because the pension is not the deceased's asset (it belongs to the trustees of the pension scheme, who pay it at their discretion), it is not caught by s5(1) IHTA 1984 (which taxes property to which the deceased was beneficially entitled immediately before death). The member's 'nomination form' (expression of wishes) instructs the trustees who to consider paying to, but it is not binding. In practice, pension trustees almost always follow the nomination form. This outside-estate position has made DC pensions an extremely efficient vehicle for inter-generational wealth transfer — a person can drawdown throughout their lifetime and leave their entire pension pot to their children with zero IHT. The April 2027 reform changes this fundamentally.
The April 2027 reform — how DC pensions enter the IHT estate
Announced in the Autumn Budget October 2024 and legislated through Finance Act 2024 (with implementation regulations and HMRC technical guidance following through 2025-26), the April 2027 reform brings undrawn defined contribution pension death benefits into the IHT estate from 6 April 2027. How it works: at the date of death, the value of the undrawn pension fund (the remaining 'pot' in the SIPP, personal pension, or workplace DC pension) is included in the deceased's IHT estate. The IHT is charged at 40% on the pension value (subject to NRB/RNRB/other exemptions available). The pension trustees (scheme administrator) become liable for calculating and paying the IHT attributable to the pension element. Only once IHT is paid does the trustees release the net (post-IHT) death benefit to the nominated beneficiaries. This is a significant administrative change for pension providers — they must calculate the deceased's total estate, determine the available IHT thresholds, apportion the IHT to the pension, pay it to HMRC, and then pay the net benefit. For the beneficiary: they receive a smaller amount (after IHT). If the beneficiary then takes the inherited pension in drawdown and makes withdrawals, those withdrawals are subject to income tax at their marginal rate (creating the double taxation issue). Scope: the reform applies to DC pensions — SIPPs, personal pensions, workplace money purchase. Defined benefit (DB) pension death benefits: the reform applies differently to DB pensions (the lump sum death benefit and spouse's pension rules are different); the government consulted separately on DB pensions and the final rules are still being developed as of mid-2026. State pension: not affected (it is not a 'pot' — it's an income stream that ceases on death).
The double taxation problem — IHT on death AND income tax on drawdown
One of the most significant concerns with the April 2027 reform is the potential for double taxation: the pension fund is subject to IHT at 40% on death, and then the beneficiary pays income tax at their marginal rate when they withdraw from the inherited drawdown account. Example: a beneficiary receives an inherited drawdown of £600k (after the pension trustees paid £400k IHT on a £1m SIPP fund). The beneficiary is a higher rate taxpayer and withdraws the £600k over a number of years — paying 40% income tax on each withdrawal. Income tax on £600k = £240k. Total tax paid: £400k (IHT) + £240k (income tax) = £640k on an original £1m pension fund = 64% combined tax rate. The government acknowledged the double taxation issue during the consultation process and has committed to developing a regime that reduces or eliminates the double taxation effect. Options being considered include: (a) a credit against income tax for IHT paid (so the inherited drawdown can be withdrawn with a reduced income tax rate to account for the IHT already paid); (b) an exempt amount of income tax for inherited drawdown that has already borne IHT. Final legislation resolving the double taxation issue was expected by late 2026, ahead of the April 2027 implementation date. The position as of June 2026 is that the double taxation regime is still being developed. Pension savers and their advisers should monitor HMRC guidance and draft regulations closely.
Pre-April 2027 planning strategies — acting now to reduce pension IHT
With April 2027 less than 1 year away, several strategies can reduce the IHT impact of the reform: (1) Pension drawdown now and IHT-efficient reinvestment: draw pension funds before April 2027 and pay income tax now (before IHT applies from April 2027). Reinvest the net proceeds in IHT-efficient assets: AIM BPR shares (direct, not ISA; 100% BPR after 2yr minimum — subject to April 2026 £1m cap); lifetime PETs to children (7yr clock starts); agricultural property (APR); life insurance in trust (lump sum outside estate). The break-even analysis depends on the income tax rate on the drawdown vs the expected IHT saving. (2) Normal expenditure from income (s21 IHTA): if pension income is genuine surplus income (you don't need it for your normal standard of living), gift it regularly and habitually. Regular gifts from income — under s21 IHTA — are immediately IHT-exempt, uncapped, and do not need to survive 7 years. This is the most powerful and simplest strategy for pension savers who have surplus pension income. Keep records: IHT403 supplementary form requires evidence of the habitual pattern of giving; bank statements; schedule of gifts. (3) AIM BPR shares (if not already held): buy qualifying AIM shares directly (not in ISA); the 2-year holding period starts from purchase; after 2yr, the AIM shares qualify for 100% BPR (£1m cap from April 2026). A £200k AIM portfolio qualifying for BPR saves £80k IHT — compared to £200k in the pension post-April 2027 potentially saving nothing at IHT (if above NRB). (4) Nomination form review: update pension nominations to ensure the pension goes to the right person in the right structure. Consider whether spouse should be the primary nominee (spousal exemption on pension may be enacted). Consider nominating a charity for part of the pension — charitable exemption (s23 IHTA) should apply to the pension element going to charity; the charity gets it free of IHT. (5) Consider annuity: for pension savers who are primarily concerned about leaving a legacy, an annuity from April 2027 avoids the IHT issue entirely (no residual fund; no IHT). The annuity vs drawdown decision should be taken with specialist pension and IHT advice.
The proposed spousal exemption on pensions — what is known as of June 2026
A significant concern under the April 2027 reform is whether pensions passing to a surviving spouse or civil partner (by nomination) will be IHT-exempt, in the same way that the s18 IHTA spousal exemption covers lifetime and death transfers of other assets. As of June 2026: the government has acknowledged the spousal exemption issue and has committed to consulting on it further. The current position (not yet enacted) is that the pension passing to a spouse nominee is NOT automatically IHT-exempt from April 2027 — the pension is in the estate and IHT is charged, then the spouse gets the net amount. Whether a spousal exemption is enacted before April 2027 is uncertain. Final regulations and guidance from HMRC are expected by autumn 2026. Planning in light of uncertainty: even if a spousal exemption is not enacted, spouses can still inherit the pension (post-IHT) and continue in drawdown; income tax on the spouse's subsequent withdrawals applies. If a spousal exemption IS enacted: nominating a spouse becomes highly efficient (pension goes to spouse IHT-exempt; spouse's estate then includes the pension on second death at whatever IHT rate applies). This creates a 'defer to second death' strategy for pensions, similar to how property often passes first to the surviving spouse. Pension savers should keep nomination forms under review and update them once the final rules are known.
Frequently Asked Questions
When do pensions become subject to inheritance tax?
Defined contribution (DC) pension death benefits will enter the deceased's IHT estate from 6 April 2027 (Finance Act 2024 / Autumn Budget 2024). Currently (until 5 April 2027): DC pensions are outside the IHT estate — they are held in trust by the pension scheme and paid at the trustees' discretion to nominees, with no IHT charged on the pension value. From 6 April 2027: the undrawn pension fund value becomes part of the estate; the pension trustees are responsible for calculating and paying the IHT before distributing the net death benefit. This applies to SIPPs, personal pensions, and workplace money purchase pensions. The government is still developing the rules for defined benefit (DB) pension death benefits — the DB position may differ from DC.
How much inheritance tax will be charged on my pension from April 2027?
From April 2027, the undrawn DC pension death benefit is added to the rest of the deceased's estate and IHT at 40% is charged on the total above the available thresholds (NRB £325k; RNRB £175k for homes to direct descendants). If the NRB and RNRB are already fully used by the non-pension estate, the pension is taxed at the full 40%. Example: pension fund £500k; all other assets pass under will and NRB/RNRB are exhausted. IHT on pension = 40% × £500k = £200k. The beneficiary receives the net £300k in inherited drawdown. If the beneficiary then withdraws from the inherited drawdown, they pay income tax at their marginal rate on the withdrawals — creating a potential double taxation problem. The government is developing a regime to reduce or eliminate double taxation, but final rules are pending as of June 2026.
What can I do now to reduce the IHT on my pension before April 2027?
Several strategies should be considered before April 2027: (1) Draw down pension funds now and reinvest in IHT-efficient assets — pay income tax now; invest net-of-tax proceeds in directly held AIM BPR shares (100% BPR after 2yr, subject to £1m cap), lifetime gifts (PETs — 7yr clock), or agricultural property (APR). (2) Normal expenditure from income (s21 IHTA): if your pension income is surplus to your needs, make regular gifts from that income — immediately IHT-exempt, uncapped, no 7-year rule. (3) Update nomination forms — ensure your pension goes to the right person; consider whether a spousal exemption may be enacted. (4) Consider an annuity: converting part of your DC pot to an annuity eliminates the IHT problem on that portion (the annuity fund is consumed in lifetime payments; no residual pot for IHT on death). (5) Consider charitable nomination: leaving part of the pension to charity should attract the charitable IHT exemption (s23 IHTA) — the charity receives the pension free of IHT.
Will the spousal exemption apply to pensions for inheritance tax from April 2027?
This is still unclear as of June 2026. The government acknowledged in its consultation that pensions passing to a surviving spouse (by nomination) should ideally be treated similarly to other assets passing to a spouse — which would be s18 IHTA spousal exempt and IHT-free. However, a formal spousal exemption for pensions has not yet been enacted in legislation as of June 2026. Final regulations and HMRC guidance are expected by autumn 2026 before the April 2027 implementation. Planning under uncertainty: keep nomination forms current and prepared to update quickly once the final rules are known. If a spousal exemption IS enacted, nominating a spouse becomes very efficient. If it is NOT enacted, the pension is subject to IHT regardless of who receives it (unless some other exemption applies — e.g., charity nomination).
Does the April 2027 pension IHT reform affect defined benefit (DB) pensions?
The April 2027 reform primarily targets defined contribution (DC) pensions — SIPPs, personal pensions, and workplace money purchase pensions. Defined benefit (DB) pensions are different in structure: they don't have a 'pot' in the same way; instead, they pay an income to the member for life and typically a reduced spouse's pension on death, plus potentially a lump sum death benefit. The government consulted separately on DB pension death benefits under the reform and the final rules for DB are still under development as of June 2026 — it is not yet clear precisely how DB death-in-service lump sums and death-in-deferment lump sums will be treated. The changes are most significant for people with large SIPP or personal pension pots, or substantial workplace DC pension funds, rather than DB pension members.
Update Your Will and Nomination Forms Before April 2027
The April 2027 pension IHT reform changes who should be nominated, how assets should be structured, and what your will should direct. Get the right will in place now. WillSafe will kits from £39.99.
View Will Kits from £39.99