The change is about the date of death
The new rules apply where the pension member dies on or after 6 April 2027. If death occurs before that date, the current rules continue even where trustees decide the beneficiaries or pay the benefit later. That boundary matters more than the payment date.
| Death date | Broad inheritance-tax position |
|---|---|
| Before 6 April 2027 | Discretionary pension death benefits are usually outside the estate under current rules, although non-discretionary rights and other exceptions can already be within scope. |
| On or after 6 April 2027 | Most unused funds and pension death benefits become “notional pension property” included in the estate calculation, whether or not trustees retain discretion. |
Trustee discretion does not disappear. It still determines who becomes entitled and when. What changes is the inheritance-tax treatment: discretion will no longer, by itself, keep the pension outside the estate.
What will normally be brought into scope?
| Benefit | From 6 April 2027 |
|---|---|
| SIPP or other defined-contribution pot | The value available to provide death benefits immediately before death will normally be included. |
| Drawdown fund | Any unused fund remaining at death will normally form part of the notional pension property. |
| Defined-benefit lump sum | A death grant or other lump sum that must, may or can reasonably be expected to be paid can be included. |
| Guarantee-period payments | Continuing pension or annuity payments under a guarantee can be valued by reference to the maximum lump sum payable and brought into scope. |
| Qualifying overseas pension | QNUPS and section 615(3) scheme property can be included, subject to the member’s long-term UK residence and where the scheme is established. |
The statutory value is the open-market value immediately before death, less excluded benefits. For a straightforward money-purchase pension this will often resemble the date-of-death pot value. Defined-benefit and guaranteed-payment valuations can be more specialised.
What is excluded or may be exempt?
| Category | Treatment |
|---|---|
| Dependants’ scheme pension | An authorised pension paid to a qualifying dependant is excluded from notional pension property, although the income is normally taxable on the recipient. |
| Joint-life annuity | A dependant’s or nominee’s annuity purchased together with the member’s lifetime annuity can be excluded. |
| Death in service | A genuine benefit linked to the member’s current employment or work immediately before death is excluded. A deferred benefit from an old employer is not automatically death in service. |
| Spouse or civil partner | Property may be included in the valuation but an applicable spouse or civil-partner exemption can remove the charge. Residence status still needs checking. |
| Charity | A qualifying charitable beneficiary can be exempt, and charitable giving can sometimes reduce the rate on the relevant estate component to 36%. |
Dubai residence does not remove a UK pension
For a non-long-term UK resident, a registered pension scheme established in the UK remains within the new inheritance-tax machinery. A long-term UK resident can also bring qualifying overseas pension property into scope, regardless of where the scheme is established. Therefore a UAE residence visa, Dubai address or UAE beneficiary nomination does not relocate a UK SIPP.
This is separate from the tax treatment of later pension income. The UK-UAE treaty can affect Income Tax on private pension payments to a UAE-resident beneficiary, but it does not switch off UK Inheritance Tax on notional pension property.
The pension uses the same estate allowances – not a new allowance
There is no separate inheritance-tax allowance for pensions. The pension is combined with the rest of the estate, after deducting excluded benefits and applying relevant exemptions and reliefs. The ordinary nil-rate band is £325,000. A residence nil-rate band of up to £175,000 may also be available where a qualifying home passes to direct descendants, subject to the estate conditions and the £2 million taper.
The residence nil-rate band is not an allowance against the pension itself. However, adding pension wealth to the estate can change the total estate calculation and may contribute to the £2 million taper test. Married couples and civil partners can also have transferable unused bands, but that is an estate-wide calculation rather than a pension rule.
A worked estate example
| Fact | Illustrative treatment |
|---|---|
| Widowed member dies after 6 April 2027 | Assume no spouse exemption is available and no transferable bands for simplicity. |
| Home and other assets: £900,000 | These already sit within the estate before adding the pension. |
| UK SIPP: £600,000 to adult children | The SIPP is normally added as notional pension property, producing a gross estate of £1.5 million. |
| Allowances: £325,000 + £175,000 | Assume the full nil-rate band and residence nil-rate band are available: total £500,000. |
| Illustrative taxable estate: £1 million | At 40%, the simplified inheritance-tax figure is £400,000. Without the SIPP, the same assumptions produce £160,000: an illustrative £240,000 increase. |
This is deliberately simplified. Debts, lifetime gifts, transferable allowances, residence status, exemptions, reliefs, charitable gifts and the actual beneficiary allocation can all change the result. It does show the key point: the pension can use up allowances or enlarge the amount taxed, but it is not charged in isolation.
Income Tax can still matter after Inheritance Tax
Age 75 remains important for pension death-benefit Income Tax. Benefits inherited after death before 75 are often tax-free if the detailed conditions are met. After 75, inherited drawdown, annuities and most lump sums are normally taxable pension income. That remains a separate regime from the estate calculation.
Finance Act 2026 contains relief so the part of a taxable pension benefit that bears the burden of Inheritance Tax is not taxed again as pension income. Where the provider pays the tax directly, Income Tax applies to the net pension benefit. Other routes may require the beneficiary to work with HMRC to obtain the adjustment. This reduces double taxation, but does not make the administration simple.
Who reports and pays the tax?
| Party | Main responsibility |
|---|---|
| Personal representatives | Identify pensions, request values, combine them with the estate, submit the account and pay the tax. The normal deadline is the end of the sixth month after death. |
| Pension administrator | Provide the date-of-death value and exempt/non-exempt beneficiary split. It does not normally calculate the estate’s tax. |
| Beneficiary | Once benefits vest, the beneficiary becomes jointly and severally liable for tax attributable to their pension entitlement. |
| HMRC | Receives the estate return and tax, supplies the calculation and will provide supporting tools and detailed guidance before implementation. |
If tax may be due, a personal representative can issue a withholding notice requiring a UK registered scheme to retain up to 50% of a non-exempt beneficiary’s entitlement. The notice can operate only within the statutory period ending 15 months after the end of the month of death. A valid payment notice can direct the scheme to pay at least £1,000 of tax and interest directly to HMRC from unpaid benefits.
What should pension holders review now?
| Step | Action |
|---|---|
| 1. Inventory | List every UK and overseas pension, provider, policy number and current value. |
| 2. Classify | Separate money purchase, defined benefit, annuity, death-in-service and overseas arrangements. |
| 3. Nominate | Update expressions of wish, alternates, contact details and intended percentage shares. |
| 4. Locate | Record where each scheme is established and whether long-term UK residence can bring it into scope. |
| 5. Model | Combine pension values with property, investments, life cover, debts, gifts and allowances. |
| 6. Stress-test | Compare death before and after 75, first and second death, and UK versus overseas beneficiaries. |
| 7. Check liquidity | Decide how tax could be paid without forcing unsuitable sales or disadvantaging a different beneficiary. |
| 8. Coordinate | Align the will, pension nominations, trusts, protection and cross-border tax advice. |
| 9. Document | Give executors a secure pension schedule and clear professional contact list. |
| 10. Review | Revisit after HMRC publishes final guidance and whenever residence, family or pension values change. |
The planning point
The old sequence – spend taxable assets first and preserve the pension for inheritance – can no longer be treated as a default. From April 2027, pension wealth, lifetime income, beneficiary choice, estate allowances and liquidity must be modelled together. The objective is not to empty the pension before the rule changes. It is to give each pool of wealth a deliberate job.
