By Jasvir Patel, Wills and Probate Consultant Solicitor, The Legal Practice Solicitors
Jasvir leads our wills and probate work and advises families on estate planning, wills, trusts and probate. She can be reached on 0208 903 7017 or at jpatel@thelegalpractice.co.uk.
For years, a pension has been one of the most tax-efficient ways to pass wealth to the people you love. That is about to change. From 6 April 2027, most unused pension funds and lump-sum death benefits will be treated as part of your estate for Inheritance Tax (IHT). For many families, it will not make a penny of difference. For others, particularly blended families, second marriages, and couples who live together but are not married, it could mean a tax bill their loved ones are not expecting.
At The Legal Practice, we are already hearing from clients who have read a headline about “pensions being taxed” and want to know what it means for them. This guide walks you through what is changing, who is most likely to feel it, and the practical steps you can take now. Please treat it as information rather than advice on your personal circumstances. Every family is different, and the law is still moving through Parliament as part of the Finance Bill 2025 to 2026.
What is actually changing
Under the current rules, most unused defined contribution pension pots, whether you have touched them or not, sit outside your estate for IHT. That includes SIPPs, workplace pensions and personal pensions. If you die, your scheme’s trustees can usually pay the funds to whoever you nominated, without Inheritance Tax being applied.
From 6 April 2027, under provisions set out in the draft Finance Bill 2025 to 2026, most unused pension funds and lump-sum death benefits will fall inside the estate for IHT. The nil-rate band (£325,000) and, where it applies, the residence nil-rate band (up to £175,000) will still apply. Both thresholds are currently frozen until April 2030/31, so their real-terms value is falling each year. Above those thresholds, IHT will be charged at 40% in the usual way.
A few important points worth holding on to:
- Transfers on death to a surviving spouse or civil partner remain exempt under the general IHT spousal exemption. This exemption does not extend to unmarried partners, however long you have lived together.
- Gifts to registered charities remain exempt, and the reduced 36% IHT rate where at least 10% of the net estate passes to charity is preserved.
- Defined benefit pensions that pay a continuing pension, for example a surviving spouse’s pension from a final-salary scheme, are largely unaffected because they do not have a capital value passing to beneficiaries.
- Death-in-service benefits paid from registered pension schemes are expected to remain outside the estate for IHT, provided certain conditions are met.
- Personal representatives, usually the executors of the will, will be responsible for reporting and paying any IHT due on the pension element. Where they reasonably expect IHT to be due, they can give a “withholding notice” directing the pension scheme to hold back up to 50% of the taxable benefits for up to 15 months from the date of death, and to pay the IHT to HMRC before releasing the rest to beneficiaries.
- To avoid the same money being taxed twice, the draft regulations provide that income tax will not be charged on the portion of death benefits equivalent to the IHT paid on that pension. The protection is welcome, but the income tax position on the remainder, particularly where the pension holder dies after age 75, can still be significant.
HMRC estimates that around 10,500 estates a year will become liable for IHT for the first time because of these changes, with a further 38,500 or so paying more than they otherwise would have done. In the grand scheme of UK deaths, that is a small minority. But if you are in that minority, the numbers can be significant.
Why blended families and unmarried partners need to pay closer attention
Most of the commentary on these changes has been written for the traditional picture: a married couple, long marriage, children who are mutual to both spouses, a family home and a pension. That family can usually defer IHT on first death using the spousal exemption, and the survivor inherits any unused nil-rate bands.
Real life is often more complicated. Three patterns come up repeatedly in our client meetings.
Unmarried couples who have lived together for decades. There is no spousal exemption. If one partner dies with a significant unused pension pot, the survivor may inherit it, but from April 2027 the pot will be added to the estate before any IHT calculation. The survivor gets no automatic relief simply by virtue of the relationship. Marriage or civil partnership would change the position entirely. Many couples decide that is not the right answer for them, which is why advance planning matters so much. The picture is made worse if there is no will, because intestacy rules give unmarried partners nothing.
Second marriages with children from an earlier relationship. Many people leave a life interest in the family home to their new spouse, with the capital eventually passing to their own children. When a pension is added into the estate, the IHT bill can land on the children rather than the surviving spouse, because the spousal exemption only applies to what the spouse actually receives.
Religious-only marriages that are not legally recognised. A nikah that has not been followed by a civil ceremony, or a religious blessing without civil registration, does not create a spousal exemption for IHT. The Court of Appeal confirmed in Akhter v Khan [2020] EWCA Civ 122 that an unregistered religious ceremony is treated as a non-marriage, and HMRC will treat the parties as cohabitants. We have seen couples who have lived as husband and wife for thirty years and are treated by the tax system as strangers.
In each of these situations, the old “just leave the pension last” advice no longer quietly solves the problem.
A worked example
Aisha and Daniel have lived together for twenty-four years. They have two adult children. They never married. Daniel owns the family home (worth £600,000) and has a SIPP worth £450,000 that he has not yet drawn. He also has £50,000 in savings. Assume Daniel leaves everything to Aisha in his will.
Under the current rules, if Daniel died today, his pension would pass to Aisha outside his estate for IHT. His taxable estate would be the home and savings, £650,000 in total. The residence nil-rate band is not available because the home is passing to Aisha, who is not a direct descendant. After his £325,000 nil-rate band, £325,000 remains taxable at 40%, an IHT bill of around £130,000.
From 6 April 2027, the pension is added to the estate. The estate becomes £1,100,000. After the same £325,000 nil-rate band (RNRB still unavailable), £775,000 is taxable at 40%, an IHT bill of around £310,000. Aisha, who is not a spouse, does not get any exemption to reduce this. If the executors serve a withholding notice on the pension scheme, part of the pension is held back and used to pay HMRC before the remainder is released to Aisha.
If Daniel dies after the age of 75, there is a further complication: Aisha will pay income tax at her marginal rate when she draws the pension. The draft regulations prevent the same slice of money from being hit by both taxes, but the remainder of the pension remains subject to income tax. Depending on Aisha’s income, the effective combined rate on the inherited pension can be very high.
If Aisha and Daniel had been married, the outcome on Daniel’s death would be very different. Both the home and the pension would pass spouse-exempt, with no IHT payable on first death. The tax question would simply shift to how the estate is planned for the second death, at which point Aisha could make use of Daniel’s unused nil-rate bands.
The numbers in any real case will depend on the size of the estate, the availability of the residence nil-rate band, the ages at death, and the beneficiary’s tax position. This example is a rough illustration, not a calculation for your family.
If any of this sounds uncomfortably close to your own circumstances, it is worth having a short conversation now rather than in two years. Call Jasvir on [PHONE] or email jpatel@thelegalpractice.co.uk for a free twenty-minute initial chat.
What about executors?
One practical point that is getting less attention than it should: the IHT on an estate is normally due within six months of the date of death. Pensions are not always quick to release. From April 2027, executors will need to coordinate with pension scheme administrators, work out what is exempt and what is not, and decide whether a withholding notice is appropriate.
If your estate has significant pension wealth but limited liquid assets, your executors could find themselves with a tax bill they cannot easily pay on time. That is a conversation worth having now, not in a bereaved household six months after you are gone.
What to do now: a practical checklist
Please treat this as a starting point, not a to-do list for everyone. Which steps apply to you will depend on your family, your assets, and what you are trying to achieve.
- Find out the current value of every pension you hold, including old workplace schemes you may have forgotten.
- Pull out your expression of wish (or nomination) forms for each scheme. Check who is named. Check whether they are still the right people.
- If you own property with a partner you are not married to, consider whether a declaration of trust and a cohabitation agreement are in place. They do not solve the IHT position, but they clarify ownership and intentions, which makes every other piece of planning easier.
- If you are in a second marriage or have children from a previous relationship, review your will. The order of deaths can change who bears the IHT bill on your pension.
- Make sure you have an up-to-date will. Unmarried partners have no automatic rights under intestacy rules, which makes a valid will essential rather than optional.
- If your estate is approaching £2 million when pensions are included, consider whether lifetime gifting, annuity purchase, or charitable giving could bring the estate below the taper threshold and protect the residence nil-rate band.
- Talk to a regulated financial adviser about the income tax position for beneficiaries, particularly if you are over 75 or may be by April 2027. The tax picture should inform your planning, but it shouldn’t dictate decisions that don’t otherwise serve your family.
- Think about liquidity for your executors: is there enough accessible cash to pay any IHT on time, or would life insurance written in trust be appropriate?
- Revisit the plan at least every two years, or sooner if your circumstances change.
What to do next
The rules take effect on 6 April 2027, but pension nominations, wills and trust structures take weeks rather than days to put in place. The earlier you start, the more options you have, and the less pressure your family will face later.
If you would like to talk it through, we offer a free twenty-minute call with a solicitor on our wills and probate team. We will listen, tell you honestly whether you need to act, and explain what any next steps would cost if you do. No pressure, no jargon.
Call us on 0208 903 7017 email jpatel@thelegalpractice.co.uk, or book a time directly at [BOOKING LINK]. Appointments are available at our London office and by video.
At The Legal Practice, our wills and probate team works alongside our property and family teams, which means we can look at your will, your home ownership and your relationship status together rather than in isolation. For the April 2027 changes, that joined-up view is where most of the value lies.
This article is a general summary of the proposed rules in the Finance Bill 2025 to 2026 and HMRC guidance as at the date of publication. It is not legal, tax or financial advice. The legislation remains subject to parliamentary approval and further guidance, and details may change before 6 April 2027. You should take advice on your own circumstances before making any decisions.