Families could pay up to 64% tax on inherited UK pensions from 2027

Families inheriting a UK pension from April 2027 could face an effective tax rate of up to 64% after HMRC set out plans to deny pension assets several inheritance tax reliefs available elsewhere in an estate.

From 6 April 2027, most unused pension funds and pension death benefits count towards the value of a deceased person’s estate for inheritance tax, a change the Finance Act 2026 put into law when it received Royal Assent on 18 March 2026.

Inheritance tax applies at 40% above the £325,000 nil-rate band. HMRC published a technical note on 11 May 2026 setting out how the regime will work, and says the reform removes distortions that have led to pensions being marketed as a vehicle for passing on wealth rather than funding retirement.

Death in service benefits paid from a registered pension scheme stay outside the estate.

That note confirms loss on sale relief, business property relief, agricultural property relief and the option to settle inheritance tax in instalments will not apply to assets held inside a pension.

HMRC’s reasoning rests on the position that a pension saver does not own the scheme’s assets, even though those assets now enter the saver’s estate for inheritance tax purposes.

“HMRC’s proposed approach risks making a bad policy even worse,” said Rachel Vahey, Head of Public Policy at AJ Bell.

The firm argues the plans create a two-tier system that leaves estates with higher bills, extra late payment interest and less flexibility while families are dealing with a bereavement. It wants the government to redesign the death tax treatment of pensions, or failing that, to apply the same reliefs to pensions that apply to the rest of an estate.

Which reliefs will not apply

Loss on sale relief lets executors reclaim inheritance tax when qualifying investments sell for less than their value on the date of death, substituting the lower sale price and recovering the difference.

The relief covers investments held in an ISA but will not extend to the same holdings inside a pension.

Business property relief and agricultural property relief cut the taxable value of farmland and business assets by 100% on the first £2.5 million and by 50% above that, allowing families to pass on farms and trading businesses without selling assets to fund the tax bill.

Neither relief will apply to farmland or a business held within a pension, which leaves some executors facing larger bills and may push savers to move those assets out of a pension before death.

HMRC also allows executors to spread inheritance tax on certain assets, including commercial property, across up to ten annual instalments, with interest normally charged on the outstanding balance.

That option disappears where the commercial property sits inside a pension, leaving an executor chasing a quick sale to settle the bill.

Quick succession relief survives. It reduces the tax due when the same assets face inheritance tax twice within five years – once on a parent’s estate and again on the child’s – on a sliding scale tied to how long passed between the two transfers.

The second tax charge

Pension assets can face tax twice. The estate pays inheritance tax on the capital, and where the saver died at 75 or over, the beneficiary then pays income tax at their marginal rate on what they draw.

AJ Bell puts the combined effect at up to 64% for a higher-rate taxpayer.

Where the saver died before 75, lump sum death benefits generally remain free of income tax, subject to the lump sum and death benefit allowance.

Government estimates put around 213,000 estates as holding inheritable pension wealth in 2027-28, with roughly 10,500 of them – about 1.5% of UK deaths – becoming liable for inheritance tax when they would not have been before.

HMRC plans to publish final guidance, templates and interactive tools for personal representatives in spring 2027, weeks before the rules take effect.

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