What changes
Finance Act 2026, section 66, brings most unused pension funds and death benefits into a person’s estate for inheritance tax when they die on or after 6 April 2027. Until then, money left in a pension, such as a defined contribution pot, has usually been outside the estate because the scheme decided who got it.
From April 2027 the pension’s value is added to the rest of the estate. It shares the same nil-rate band and residence band, so a pension can push an estate that was under the bands into tax, and can push a larger estate over the £2 million line where the residence band starts to taper.
What stays free
- A pension left to a spouse or civil partner is exempt, like anything else left to them.
- A pension left to a charity is exempt, and counts towards the 10% needed for the 36% rate.
- Death-in-service benefits paid by an employer’s scheme are left out of the estate.
- Deaths before 6 April 2027 follow the old rules.
Who pays, and how it’s shared
The estate’s inheritance tax is worked out on everything together. It is then shared between the pension and the rest of the estate in proportion to their values. The executors deal with HMRC and pay the tax, with the pension scheme paying the pension’s share in the way the technical note sets out. The tax is due by the end of the sixth month after the death.
An example
An unmarried man dies after 6 April 2027 with £400,000 of other assets and a £200,000 pension left to his adult son. There’s no home going to children, so only the nil-rate band applies.
- The estate is £600,000. Less £325,000, that’s £275,000 taxed at 40%: £110,000.
- The pension is a third of the chargeable estate, so its share is £36,667. The rest of the estate pays £73,333.
Had he died before April 2027, the pension would have been outside the estate and the tax would have been £30,000. If the pension had gone to a wife, or been a death-in-service benefit, the tax would also be £30,000.
What isn’t clear yet
HMRC hasn’t yet published full guidance on how pensions count in two places: the £2 million taper on the residence band, and the baseline for the 36% charity rate. Our calculator counts the pension in both and flags the result as an estimate. Income tax can also be due on inherited pension money, depending on the age of the person who died; that’s separate from inheritance tax and outside our calculator.
Things to think about
- Check who your pension’s nomination form names. A pension nominated to a spouse stays exempt.
- Executors will need the pension’s value at death from the scheme, alongside everything else.
- If a pension brings the estate near £2 million, the residence band may be cut.
These rules are new and the details are still being settled, so take advice before changing your plans because of them.