The Finance (No. 2) Bill received Royal Assent on 18 March 2026, becoming the Finance Act 2026. Pensions have historically been out of scope for inheritance tax (IHT) purposes, but the Act brings most unused pension funds and death benefits within the value of an individual’s estate for IHT purposes from 6 April 2027.

Published: 24 March 2026
Authors: Suzanne Burrell

What is changing?

Most unused pension funds and death benefits will, from 6 April 2027, be included in the value of a person’s estate when determining IHT liability and thresholds. Currently, most unused pensions and death benefits are paid tax-free to beneficiaries, and this will remain the case for any deaths occurring before 6 April 2027.

An “unused” pension is one which has not been used to claim an income. For money purchase arrangements, this will include all money held in a pension savings pot. For defined benefit arrangements, this will include lump sum death benefits that do not fall within any of the exclusions.

The standard IHT threshold, excluding the Residence Nil Rate Band, is currently £325,000 and so no IHT will be due if the value of the estate does not exceed this amount. The estate will include the property, money and possessions of someone that has died. The value of the estate needs to be estimated to check if it exceeds the threshold. If it does, valuations will be needed for the assets to calculate the amount of IHT due. The standard rate of IHT is 40%.

What is excluded from the scope of IHT?

The following benefits under a pension scheme will be “excluded benefits” for the purposes of the legislation and so will not be in-scope of IHT:

• a dependants’ scheme pension
• a trivial commutation lump sum benefit payment to a person which extinguishes the person’s entitlement to a dependants’ scheme pension
• a dependants’ or nominees’ annuity that was purchased together with a member’s lifetime annuity
• death in service benefits

Charitable lump sum death benefits and transfers between spouses and civil partners will also be out of scope.

How will IHT be paid?

Personal representatives, who already report and pay IHT on a deceased person’s estate, will be responsible for reporting and paying any IHT due on unused pension funds and death benefits.

Personal representatives, and prospective personal representatives, may give notice to the scheme administrator of a registered pension scheme if they know, or have reason to believe, that they may be liable for IHT attributable to unused pension or death benefits. This is known as a ‘withholding notice’ and it can have effect for up to 15 months after the end of the month in which the deceased member died and helps ensure there are enough funds available to pay IHT due.

While this notice has effect, the pension scheme administrator can only pay benefits that do not result in more than 50% of a beneficiary’s entitlement being paid out. If more than 50% has been paid before the withholding notice is received, the pension scheme administrator must not make any further payments to that beneficiary.

If a personal representative receives a clearance certificate from HMRC, they will not be liable for IHT due in respect of pensions later discovered unless the failure to disclose the pension was due to carelessness on the personal representative’s behalf.

Is a scheme administrator liable to pay IHT?

A beneficiary or personal representative may by notice require that the pension scheme administrator pays the IHT directly to HMRC on their behalf if the IHT due is at least £1,000. The notice must meet certain conditions. The pension scheme administrator must pay the amount of tax specified in the notice before the end of a period of 35 days, beginning with the day on which they receive the notice.

Any scheme rules restricting the payment of IHT to HMRC by the pension scheme administrator will be considered void.

Pension scheme administrators are liable for IHT if they have failed to comply with a direct payment notice given by a beneficiary or if they have paid benefits in breach of a withholding notice.

Key takeaways

It is expected that HMRC will provide guidance on the changes to support personal representatives, scheme administrators and beneficiaries ahead of 6 April 2027. There is still some time until the measures are in force, but now that the legislation is finalised, trustees and employers may want to consider writing to members to communicate the upcoming changes. Trustees should also work with their advisers to identify potential benefits that fall within the scope of IHT changes as well as developing processes to ensure that the new requirements are met when settling any death benefits from 6 April 2027.