Inheritance tax on discretionary pensions to apply from April 2027

Inheritance tax rules for discretionary pension schemes change on 6 April 2027, according to a GOV.UK policy paper. From that date, most unused pension funds and death benefits will be counted as part of a person’s estate when they die. The government documents reviewed for this story contain no plans for an autumn budget 2026 change to inheritance tax or discretionary trusts, so this report sets out what has been confirmed.

What is changing and when

Most UK pension schemes are discretionary, meaning trustees or administrators decide who receives the money after a member dies. GOV.UK says unused funds in those schemes can currently be passed on without an inheritance tax charge. Non-discretionary schemes, such as the NHS and judicial schemes, are already treated as part of the estate.

The change removes that difference. The government will legislate in Finance Bill 2025-26 to include unused pension funds and death benefits in the estate whether or not administrators or trustees have discretion. The measure applies to pension member deaths on or after 6 April 2027.

The route to that date has been public for some time. The change was announced at Autumn Budget 2024, a technical consultation ran from 30 October 2024 to 22 January 2025, and the government published its response on 21 July 2025 alongside draft legislation. HMRC has said it will publish further guidance and tools before April 2027. GOV.UK sets out the expected Exchequer gain, certified by the Office for Budget Responsibility:

GOV.UK says these figures include the expected behavioural response, such as people spending pension money faster.

Who is affected

The government says most estates will still owe no inheritance tax. Of around 213,000 estates with inheritable pension wealth in 2027 to 2028, it estimates 10,500 will become liable where they would not have been before, and about 38,500 will pay more than they otherwise would. The average liability is expected to rise by around £34,000, though the government says these figures are a maximum because they ignore behavioural change.

A worked example shows how this could look. Take an estate of £500,000 plus a £100,000 unused pension, with the £325,000 nil-rate band and the 40% rate referred to in the government’s response, and no spouse, charity or other reliefs. Before the change, tax would be 40% of £175,000, or £70,000. Afterwards it would be 40% of £275,000, or £110,000, a rise of £40,000. This is an illustration, not a forecast, and it ignores other allowances the sources do not detail.

An estate of £300,000 including a £100,000 pension would stay below the nil-rate band and owe nothing. The existing exemptions for death benefits passing to a surviving spouse, civil partner or registered charity are being kept. Death in service benefits from registered pension schemes are excluded, whether the scheme is discretionary or not.

What supporters and critics say

The government’s case is about fairness and tax planning. The policy paper says the measure “removes distortions which have led to pension schemes being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement”. It also points to pension freedoms in 2015 and the abolition of the lifetime allowance in March 2023 as changes that made pensions easier to use that way.

Critics were heard during consultation, which drew 649 written responses and nine workshops with professionals. The summary of responses says many respondents “were not opposed in principle” to bringing pensions into scope, but most raised significant concerns about making pension scheme administrators liable. They warned that administrators would probably pay the maximum possible 40% on account to avoid late-payment interest, which could delay payments to beneficiaries.

The government accepted the point and switched liability to personal representatives. It also acknowledged that a small number of estates will lack enough liquid funds to pay the tax on the pension element, and said it would set out steps to address this. Respondents also criticised the treatment of death in service benefits, and the government changed its approach there as well.

What to do now

If you hold a pension, the first step is to check whether it is a discretionary scheme and what death benefits it would pay. Death in service cover through a registered scheme is outside the charge. Anything else you expect to leave unused should be counted in your estate when you work out whether it exceeds the £325,000 nil-rate band.

If you may act as a personal representative, note that you will be responsible for reporting and paying tax due on pension funds from 6 April 2027. GOV.UK says around 75% of IHT400 forms are submitted by agents. HMRC says guidance will follow, so check GOV.UK before relying on any summary. Regulated financial or legal advice is sensible before changing a pension plan, because the rules are not yet in force.

Your questions answered

Can you get around inheritance tax with a trust?

The sources reviewed do not cover trusts, so we cannot say. They do show the government is closing what it sees as a planning route, namely using discretionary pensions to pass on wealth outside the estate.

How is tax calculated on capital distributions from discretionary trusts in the UK?

The sources do not set out trust distribution charges. For pensions, unused funds will be added to the estate and taxed alongside other assets, with the first £325,000 of an estate free of inheritance tax.

How much money does inheritance tax raise in the UK?

The sources do not give a total. They say fewer than 10% of estates are forecast to owe inheritance tax in the coming years. The pension measure alone is expected to raise £640 million in 2027 to 2028, rising to £1,460 million in 2029 to 2030.