UK Pensions and Inheritance Tax: What Changes on April 6, 2027?
For many years, unused pension funds have usually sat outside a person’s estate for UK Inheritance Tax (IHT) purposes. That treatment will change for deaths on or after April 6, 2027. Under legislation enacted in Finance Act 2026, most unused pension funds and pension death benefits will be included when the value of the estate is calculated.
The reform is important for people who hold a UK pension while living in the United States, but it does not mean that every pension will face a 40% tax charge. The type of pension benefit, the location of the scheme, the member’s UK residence history, the identity of the beneficiary and the rest of the estate can all affect the result. Some benefits are excluded, and normal IHT exemptions and allowances may still apply.
What the New Rule Does
Under the new rules, the value of most unused pension funds and certain pension death benefits may be brought into the IHT calculation. Exactly what is included will depend on the type of pension and the benefits payable on death.
This change applies according to the date of death. If the pension member dies before April 6, 2027, the current rules continue to apply even if the scheme pays benefits after that date. If the member dies on or after April 6, 2027, the new provisions apply.
Trustee discretion will remain relevant because trustees may still decide who receives a discretionary death benefit. It will no longer determine whether the pension value is within IHT. A current expression of wishes can still help the trustees understand the member’s intentions, but the nomination itself is not an IHT exemption.
Which Pension Benefits May Be Included
Unused money purchase funds, including many personal pensions, workplace defined contribution pensions and Self-Invested Personal Pensions, are expected to be the most common amounts brought into scope. Funds already placed in a beneficiary drawdown account can also be relevant when that beneficiary later dies on or after April 6, 2027.
The legislation also identifies excluded benefits. These include qualifying dependants’ scheme pensions, certain trivial commutation payments derived from those pensions, and a dependants’ or nominee’s annuity purchased together with the member’s lifetime annuity. A qualifying death-in-service benefit linked to the member’s current employment or work immediately before death is also excluded. Other amounts in the same arrangement, such as a contribution refund that would have been payable in other circumstances, may not receive the same treatment.
The exact benefit design matters. A scheme name or account label is not enough to determine the result, particularly where one workplace arrangement contains retirement benefits, an insured death-in-service benefit and other lump-sum rights.
Why UK IHT Can Still Apply When You Live in the US
Moving to the United States does not automatically remove a UK pension from UK IHT. Whether a pension falls within the rules can depend on factors including the member’s UK residence history and where the pension scheme is established. As a result, some UK pensions can still fall within the UK IHT rules even after the member has moved abroad.
The US tax position should also be considered separately. US federal and state tax rules, reporting requirements and the UK-US estate and gift tax treaty may all affect the final outcome. The interaction between the two systems can be complex, particularly for families with assets in both countries.
How the Estate Calculation and Administration Will Work
The IHT charge is calculated across the total estate and then apportioned between the different elements, including the pension component. The current standard nil-rate band is £325,000, and the standard rate is 40% on the taxable value above the available threshold. A residence nil-rate band, transferred allowances and spouse, civil partner or charity exemptions may change the outcome. The value of a pension cannot be viewed in isolation from the home, investments, debts, gifts and other estate assets.
The deceased’s personal representatives will generally need to work with the pension provider to establish the value of any pension assets included in the estate. Depending on the circumstances, pension beneficiaries may also need to be involved in determining how any pension-related IHT is paid.
The new rules therefore make coordination between the pension provider, personal representatives and beneficiaries more important, particularly where the estate includes assets in both the UK and the United States.
What Pension Holders Should Review Before April 2027
The first step is not an automatic withdrawal or transfer. Either action can create UK Income Tax, US tax, investment, currency and retirement-income consequences. A useful review starts by establishing the facts and then testing the pension alongside the wider estate.
- List every UK and non-UK pension arrangement, including old workplace schemes and beneficiary drawdown accounts.
- Confirm where each scheme is legally established and what benefits are payable on death.
- Record current values, underlying investments and any illiquid assets.
- Review beneficiary nominations and identify whether any intended recipient may qualify for an IHT exemption.
- Map the member’s UK tax residence history and review the pension with the rest of the UK and US estate plan.
The April 2027 reform changes the starting point for pension and estate planning, but it does not create one answer for every family. The aim of an early review is to identify which benefits are likely to be within scope, whether the estate may have an IHT exposure, and how the UK and US parts of the plan should be coordinated before decisions are made.
Some of the content of this communication was provided by third parties of BlackPoint Capital Partners. We have not verified the information contained herein, but we believe the content is reliable. None of this content should be construed as legal, accounting or tax advice. Tax laws are complex and often have highly-individualized requirements, you should seek the advice of a competent tax professional if you have specific tax questions.
