Changes to Inheritance Tax (IHT) on Pensions

From 6th April 2027 – Update January 2026

In the 2024 Autumn Budget (30/10/24), the Chancellor announced that Inheritance Tax thresholds, which are the amount you can pass on when you die, before Inheritance Tax is due, are remaining unaltered until 2030. In the November 2025 Budget this was further extended to April 2031. But, from April 2027, pensions will no longer be exempt from Inheritance Tax. That means that Inheritance Tax may have to be paid on your pension when you die.

It’s important to note that we don’t yet have the finalised legislation, so things could change. We are also still waiting on more detail.

How Inheritance Tax on Pensions Currently Works

Currently, defined contribution pensions, where you build up a pot of money to give you an income when you retire, would not normally be part of your estate and there would be no Inheritance Tax to pay. The ‘estate’ simply means all the assets, like a house, investments or valuables, that someone owns when they die. But from 6 April 2027 defined contribution pensions will be subject to Inheritance Tax. The standard rate of Inheritance Tax is 40%.

Who will be Affected by the Change to Inheritance Tax

Even with this change, Inheritance Tax is not going to be an issue for most people. That’s because everyone has an entitlement to a nil rate band of £325,000 of assets which they can leave to anyone free of Inheritance Tax. This is also known as the Inheritance Tax threshold.

We know that many people do not have enough in their pension for the lifestyle they would like in retirement, so they may not have much, if any, money left in their pension(s) when they die. Often pensions are passed onto the pension saver’s husband, wife or civil partner and if they do not have their own pension, or only have a small pension, then they will need that pension to top up any pension savings they have. Government figures estimate that 10,500 estates will pay Inheritance Tax for the first time as a result of the changes to the rules on Inheritance Tax and pensions, and 38,500 will pay more Inheritance Tax.

But if you own your own home, then when your defined contribution pension is added to this and any other savings or investments that you have, it might be more than the amount you are able to pass on free of Inheritance Tax, and that could mean Inheritance Tax has to be paid when you die or later, when your husband, wife or civil partner dies.

If you are Married or Have a Civil Partner

If a couple are married and live in the UK, then when the first member of the couple dies, and anything they own is passed onto their husband, wife or civil partner then there is no Inheritance Tax to pay. This means that some or all of the £325,000 Inheritance Tax nil rate band which was unused on the death of the first person can be transferred to the surviving husband, wife or partner. So, this means that up to £650,000 (2 x £325,000) is available when the surviving husband or wife dies, before Inheritance Tax is paid.

In addition, if you pass on a property or the proceeds of a property sale to children, then you are also entitled to something called the Residence Nil Rate Band (RNRB). That’s up to an extra

£175,000 that each member of a couple can pass on free of Inheritance Tax. However, the addition of the residence nil rate band only applies if your direct descendants are to benefit. That means children, including stepchildren, and grandchildren. If you are married or in a civil partnership, then this, like the Inheritance Tax nil rate band, can also be transferred if the first person has not used it. So, on the death of the surviving husband, wife or civil partner, there is a maximum of £1 million available free of Inheritance Tax, i.e. 2 x £325,000 (the nil rate band) and 2 x £175,000 (the residence nil rate band). If you have no direct descendants, (children, including stepchildren, and grandchildren) then the residence nil rate band does not apply.

If you Live Together but are not Married

If a couple live together but aren’t married or in a civil partnership – the same rules do not apply as the nil rate band and the residence nil rate band cannot be transferred to the surviving partner. Couples who live together also cannot pass on assets to each other free of Inheritance Tax when they die. So, when the first partner in a couple dies there is only £325,000 available before Inheritance Tax is due rather than an unlimited amount. That means if one partner dies first and leaves £1 million to the person they live with, there will be Inheritance Tax to pay on anything over £325,000.