Grieving families will be responsible for taking 'reasonable steps' to track down their loved ones' pension funds for Inheritance Tax purposes from next spring. Pensions will be included in the estate of someone who has died from April 2027, according to a new government technical note.
Current Rules vs. New Rules
Under current rules, if you die before the age of 75, the person inheriting your pension will not have to pay tax on your retirement savings. If you die after the age of 75, those who inherit your pension will pay Income Tax when they draw from it, as it will be treated as income. However, from April 2027, inherited pensions will become subject to Inheritance Tax.
What Families Need to Do
The government has confirmed that personal representatives will be responsible for identifying the deceased person's pensions. They must then report them and pay any Inheritance Tax due. However, families will be able to request that the pension provider pay any tax due directly to HMRC. Death in service payments will not be liable for Inheritance Tax under the changes.
Impact on Estates
A further 5,000 estates became liable for Inheritance Tax during the last tax year. There were 32,000 estates subject to Inheritance Tax in 2025/26, up by 5,000 since rates reached their current level in 2020/21. An HMRC spokesperson said: 'We want to help people get their tax right and we’re continuing to provide information about how the taxation of unused pension funds and death benefit will work. More than 90% of estates will continue to pay no Inheritance Tax. Some pension benefits – including payments to spouses and civil partners – are exempt from inheritance tax, so cannot be withheld.'
Understanding Inheritance Tax
Inheritance Tax applies to gifts transferred within seven years of death, so gifts given more than seven years ago are generally exempt. If there is Inheritance Tax to pay, the standard rate is 40%. It is normally due on estates worth over £325,000, and you would pay 40% on the value above this amount. However, this threshold can often be much higher depending on who you leave your estate to. For example, there is no Inheritance Tax to pay when an estate is left to your spouse or civil partner. If you give away your home to your children (including adopted, foster, or stepchildren) or grandchildren, the Inheritance Tax threshold can increase to £500,000. This includes the basic £325,000 allowance, plus an additional £175,000. If you are married or in a civil partnership, any Inheritance Tax allowance that isn’t used can be passed on when someone dies. This means a couple can potentially pass on as much as £1 million without their estate being subject to Inheritance Tax.
Reducing Inheritance Tax
There are also ways to reduce how much Inheritance Tax is paid on your estate. Your rate of Inheritance Tax on some assets is reduced from 40% to 36% if you leave at least 10% of the net value after any deductions to a charity in your will.
