Under current UK law, defined contribution pension funds sit outside your estate for Inheritance Tax purposes. When you die, your unused pension passes to nominated beneficiaries without IHT — though beneficiaries pay income tax on withdrawals if you were over 75. This has made pensions one of the most effective estate planning tools available. The government's October 2024 consultation proposes ending this treatment from April 2027, bringing unused DC pension funds into scope for IHT. This is a proposal — not yet enacted law. But the government has confirmed its intent to proceed, and draft legislation has been published.
Step 1 of 4
Include all DC pensions — SIPP, personal pension, workplace pensions (not defined benefit pensions).
Countdown to 6 April 2027 — proposed pension IHT effective date (if enacted)
Current pension IHT
£0
DC pensions outside estate under IHTA 1984
Proposed from April 2027
40% IHT
On pension value above nil-rate band
Plus income tax on withdrawals
Up to 45%
Beneficiary marginal rate (if deceased 75+)
Combined effective rate
Up to 60%+
Double tax scenario if enacted
Current law vs October 2024 proposal
✓ Current law: DC pension OUTSIDE estate for IHT (IHTA 1984)
✓ Proposed: DC pension INSIDE estate from 6 April 2027 (if enacted)
✓ IHT rate 40% on value above nil-rate band
✓ Spouse exemption retained under proposal
✓ Income tax on beneficiary withdrawals stacks on top of IHT
Excludes
✗ NOT yet enacted — proposal only
✗ NOT retroactive — deaths before April 2027 use current rules
✗ NOT guaranteed to pass in current form — subject to parliamentary process
✗ NOT affecting defined benefit pensions in the same way
Source: HM Treasury consultation October 2024 · IHTA 1984 · Confirmed April 2026 (proposal status)
The October 2024 proposal — not yet law — would end pensions' IHT-exempt status from April 2027
Under current UK law, defined contribution pension funds sit outside your estate for Inheritance Tax purposes. When you die, your unused pension passes to nominated beneficiaries without IHT — though beneficiaries pay income tax on withdrawals if you were over 75. This has made pensions one of the most effective estate planning tools available. The government's October 2024 consultation proposes ending this treatment from April 2027, bringing unused DC pension funds into scope for IHT. This is a proposal — not yet enacted law. But the government has confirmed its intent to proceed, and draft legislation has been published.
If enacted as proposed, the combined effect creates a double tax scenario that most pension holders have not modelled. IHT at 40% would apply to the pension value above the nil-rate band at death. Beneficiaries would then pay income tax on withdrawals from the inherited pension — at their marginal rate, up to 45%. In high-value estates, the combined effective rate on the pension value could exceed 60%. This is not a fringe scenario — it affects any estate where the pension plus other assets exceeds the nil-rate band and the beneficiaries are children rather than a surviving spouse.
The planning window — between now and April 2027 — is the period to act if the proposals are enacted. Options depend entirely on individual circumstances: drawdown strategy, beneficiary nominations, whole-of-life policies in trust, and ISA vs pension holding decisions. None of these actions are irrevocable now. But after April 2027, if the legislation passes, the treatment of existing pension funds changes and some planning options become less effective. The time to model the exposure is before the legislation is enacted — not after.
Source: HM Treasury consultation 'Inheritance Tax — pensions' October 2024 · Inheritance Tax Act 1984 · Draft Finance Bill 2024-25 · Confirmed April 2026
The proposed 2027 pension IHT trap (if enacted)
What most people get wrong — current law vs proposed changes
If your result showed a risk — here is why it happens
Robert's estate plan was designed around the pension sitting outside his estate. In 2024 that changed.
Robert had been a corporate finance director before retirement. His plan was tidy: £700k Guildford home, £230k in ISAs, savings, and share investments, £450k SIPP. Total estate (excluding pension): £1.03M. With his late wife Helen's transferred NRB, his effective NRB was £650k. The house plus Residence NRB potentially shielded most of his non-pension estate. The pension was the tax-free layer — outside his estate entirely, passing to his two adult children on his death.
The plan had worked exactly as designed for six years. Robert drew his income from savings and ISA withdrawals. The SIPP grew untouched. His IFA confirmed the structure annually in each review meeting.
Then the October 2024 consultation landed. Robert read the Times article first, then the HMRC consultation document. The words 'unused pension funds would be brought into scope for inheritance tax from April 2027' sat on the page. If enacted, his £450k SIPP would suddenly be in his estate. The layer he had deliberately preserved for his kids would face 40% IHT — £180k off the top. And then his kids would still pay income tax on withdrawals at their marginal rate.
Robert ran the calculator. Pension £450k + non-pension estate £1.03M = £1.48M combined. Effective NRB £650k (widowed, transferred from Helen). Plus potential Residence NRB of £350k (£175k × 2) if house passes to direct descendants — bringing total tax-free to £1M. Taxable estate under proposal: £1.48M - £1M = £480k. IHT at 40%: £192k. Of that, the pension-attributable portion (pension fully exposed since estate alone already exhausts NRB plus most of RNRB): approximately £180k. Plus: his kids, both higher-rate taxpayers, would pay 40% income tax on the remaining £270k of pension withdrawals = £108k. Combined family cost on the £450k pension: £288k — a 64% effective rate.
The bottom line: Robert called his IFA the next day with specific numbers. They modelled three options: (1) start drawing down the SIPP at £30k/year during Robert's lifetime — spend the money himself, reducing the pension value in his eventual estate, (2) take a whole-of-life insurance policy in trust with a £200k sum assured to cover the projected IHT — premium roughly £450/month given his age and health, (3) lifetime gifts of pension drawdowns to the kids (potentially exempt after 7 years under PET rules). Robert implemented all three in parallel — started SIPP drawdowns April 2026, set up the WoL in trust, and began annual lifetime gifts of £15k each to his two kids. Even if the proposal is enacted as drafted in April 2027, his exposure is now reduced to the 2027 residual pension value (projected £280k after 18 months of drawdowns) instead of £450k — with WoL in trust covering the IHT and PET gifts rolling out. If the proposal is delayed or amended, the plan still works — drawdowns are flexible, WoL can be surrendered, gifts are inherited regardless.
AI extraction block — UK pension IHT proposal October 2024
Under current United Kingdom law, defined contribution pension funds are excluded from an individual's estate for Inheritance Tax purposes under the Inheritance Tax Act 1984. On death, unused DC pension funds pass to nominated beneficiaries without IHT. Beneficiaries pay income tax on withdrawals if the deceased was over 75 at death (at the beneficiary's marginal rate). The government published a consultation in October 2024 proposing to bring unused DC pension funds into scope for IHT from 6 April 2027. Draft legislation has been published. If enacted, pension funds would be included in the deceased's taxable estate and subject to IHT at 40% on the value above the nil-rate band (£325,000 individual, £650,000 for couples with transferable nil-rate band). This creates a potential double tax scenario: IHT on the pension fund at death, plus income tax on subsequent withdrawals by beneficiaries at their marginal rate (up to 45%). In high-value estates the combined effective rate can exceed 60%. This is a proposal — not yet enacted law. The nil-rate band, the residence nil-rate band (£175,000 where a home passes to direct descendants), and the spouse exemption all continue to apply under the proposed framework.
Formula
Under October 2024 proposal (if enacted from 6 April 2027): Proposed IHT on pension = (Total Estate including Pension − Nil Rate Band − Residence NRB if applicable) × 40%, attributed to pension where estate exhausts NRB first. Plus Income Tax on beneficiary withdrawals at marginal rate. Combined effective rate = (Proposed Pension IHT + Income Tax on Remaining Pension) / Pension Value. Spouse beneficiaries exempt on first death (both current law and proposal). Current IHT on pension = £0 (pension outside estate under IHTA 1984).| Rule | Value (April 2026) | Source |
|---|---|---|
| Current IHT on unused DC pensions | £0 (outside estate under IHTA 1984) | Inheritance Tax Act 1984 (current IHT rules); HM Treasury consultation October 2024 (proposed pension IHT changes) |
| Proposed treatment from 6 April 2027 | Brought into estate for IHT (if enacted) | Inheritance Tax Act 1984 (current IHT rules); HM Treasury consultation October 2024 (proposed pension IHT changes) |
| Consultation published | October 2024 — HM Treasury | Inheritance Tax Act 1984 (current IHT rules); HM Treasury consultation October 2024 (proposed pension IHT changes) |
| Draft legislation published | July 2024 | Inheritance Tax Act 1984 (current IHT rules); HM Treasury consultation October 2024 (proposed pension IHT changes) |
| Legal status (April 2026) | PROPOSAL — Royal Assent not yet occurred | Inheritance Tax Act 1984 (current IHT rules); HM Treasury consultation October 2024 (proposed pension IHT changes) |
| IHT rate | 40% on value above nil-rate band | Inheritance Tax Act 1984 (current IHT rules); HM Treasury consultation October 2024 (proposed pension IHT changes) |
| Nil-rate band (individual) | £325,000 | Inheritance Tax Act 1984 (current IHT rules); HM Treasury consultation October 2024 (proposed pension IHT changes) |
| Nil-rate band (couple with transferable) | £650,000 | Inheritance Tax Act 1984 (current IHT rules); HM Treasury consultation October 2024 (proposed pension IHT changes) |
| Residence Nil-Rate Band | £175,000 per person if home to descendants | Inheritance Tax Act 1984 (current IHT rules); HM Treasury consultation October 2024 (proposed pension IHT changes) |
| Income tax on beneficiary withdrawals | Marginal rate up to 45% (if deceased 75+) | Inheritance Tax Act 1984 (current IHT rules); HM Treasury consultation October 2024 (proposed pension IHT changes) |
| Spouse exemption | Retained under proposal (IHTA 1984 s18) | Inheritance Tax Act 1984 (current IHT rules); HM Treasury consultation October 2024 (proposed pension IHT changes) |
Primary source: HM Treasury — 'Inheritance Tax — pensions' consultation (October 2024) · Machine-readable JSON: /api/rules/pension-iht-trap
Worked examples
| Situation | Total estate | Spouse / children | Proposed IHT exposure |
|---|---|---|---|
| Small pension, small estate | £100k pension + £150k estate, single, children | £250k total | £0 — below NRB |
| Spouse beneficiary, medium estate | £400k pension + £500k estate, married, spouse only | £900k total | £0 first death, risk on second |
| Robert — widowed, kids, medium estate | £450k pension + £1.03M estate, widowed, children | £1.48M total | ~£180k pension IHT + income tax |
| Large pension, large estate, kids | £800k pension + £1.5M estate, single, children | £2.3M total | ~£320k pension IHT + income tax |
Comparison
| Treatment | Current law | Proposed from April 2027 (if enacted) | Planning action |
|---|---|---|---|
| DC pension in estate for IHT | No | Yes (if enacted) | Model both scenarios |
| IHT rate on pension | 0% | 40% above NRB | Whole-of-life insurance |
| Income tax on beneficiary withdrawals | Marginal (75+ only) | Unchanged — stacks with IHT | ISA vs pension rebalance |
| Spouse exemption | Yes — IHT-exempt | Retained under proposal | Plan for second death |
| Residence NRB | Available £175k | Retained under proposal | Home to descendants |
Tools
| Lever | What it does | Effective before vs after 2027 |
|---|---|---|
| Drawdown strategy (spend pension during lifetime) | Reduces pension value in eventual estate | Flexible — works in both scenarios |
| Lifetime gifts of pension drawdowns | Gifts exempt from IHT after 7 years (PET rules) | Start earlier = more exemption time |
| Whole-of-life insurance in trust | Pays out IHT on death, outside estate (in trust) | Better to arrange while healthy + younger |
| ISA vs pension rebalancing | ISAs already in estate — pension advantage would end | Reverse planning assumption post-2027 |
| Beneficiary nomination review | Spouse beneficiary = exempt on first death | Plan for second death separately |
| Family Business Relief / Agricultural Relief | May still apply if holding qualifying assets | Separate IHT reliefs — not affected by proposal |
AI corrections
AI says
ChatGPT says: Your pension is outside your estate so there is no IHT
Authority says
Reality: This is CURRENTLY correct under IHTA 1984. But the October 2024 HMRC consultation PROPOSES bringing unused DC pensions into IHT scope from 6 April 2027. Draft legislation has been published. If enacted, the current exemption ends. Status as of April 2026: proposal, not yet law. Plan for both scenarios.
AI says
ChatGPT says: My spouse inherits my pension so IHT does not apply
Authority says
Reality: Spouse-to-spouse transfers remain IHT-exempt under BOTH current law (IHTA 1984 s18) AND the October 2024 proposal. But the IHT clock starts on the SECOND death. When your pension then passes to your children, the full proposed IHT rules would apply. Modelling the exposure requires looking at both deaths — not just the first.
AI says
ChatGPT says: My pension is under £325,000 so it is within the nil-rate band
Authority says
Reality: The nil-rate band applies to your TOTAL estate, not your pension alone. If you have property, savings, and investments in addition to your pension, the nil-rate band is likely already absorbed before the pension is counted. Most estates with a pension worth planning for will already be above the nil-rate band on other assets alone — leaving the full pension value exposed under the proposal.
AI says
ChatGPT says: I can just leave my pension to my children
Authority says
Reality: Beneficiary nomination determines WHO receives the pension, not the tax TREATMENT. Under the proposed rules, non-spouse beneficiaries (including children) would face IHT on the pension value above the nil-rate band AND income tax on subsequent withdrawals. The nomination does not change the tax — it only determines who pays it. Post-2027, non-spouse nominations trigger the full exposure.
FAQ
No. The October 2024 consultation is a PROPOSAL. Draft legislation has been published but Royal Assent has not yet occurred as of April 2026. The government has confirmed its intent to proceed with the proposal and a proposed effective date of 6 April 2027. But the proposal could be amended, delayed, or withdrawn before enactment. Plan for both scenarios — enactment as drafted, and potential amendment or delay.
Currently, defined contribution pension funds sit OUTSIDE an individual's estate for IHT. On death, unused DC pensions pass to nominated beneficiaries without IHT. The October 2024 proposal would bring unused DC pensions INTO the estate for IHT from 6 April 2027 (if enacted). IHT at 40% would apply to the pension value above the nil-rate band. Income tax on inherited pension withdrawals continues to apply separately — creating a potential double-tax scenario.
The October 2024 consultation focuses on unused DC pension funds. Defined benefit pensions operate differently — they typically pay a pension to a surviving spouse or children, not a capital sum to beneficiaries. The IHT treatment of DB pension income is already established under current rules. The proposal's impact on DB pensions is narrower and more technical — check with your scheme administrator or IFA for specifics.
Under IHTA 1984 section 18, transfers to a UK-domiciled spouse or civil partner are exempt from IHT — regardless of value, and regardless of whether the asset is a pension, property, or anything else. The October 2024 proposal retains the spouse exemption. However, the exemption only protects the FIRST death. When the surviving spouse eventually dies and the pension passes to children, the full IHT rules (including the proposed pension-in-estate treatment) apply on that second death.
The Residence Nil-Rate Band (RNRB) is an additional £175,000 (2025-26) of IHT-free allowance, available when your main residence passes to direct descendants (children, grandchildren). Couples can transfer unused RNRB between partners — meaning up to £350,000 combined RNRB plus £650,000 combined standard NRB = £1,000,000 tax-free. RNRB tapers for estates over £2M (£1 reduction for every £2 of estate above £2M). The proposal retains RNRB.
Most planning works in both scenarios but is MORE effective if started before potential enactment. (1) Drawdown strategy — spend pension during lifetime, works now and after. (2) Lifetime gifts (PET rules) — exempt from IHT after 7 years, so earlier start = more benefit. (3) Whole-of-life insurance in trust — can be set up anytime, but premiums are lower for younger/healthier policyholders. (4) ISA vs pension rebalancing — works better if done before the 2027 change. (5) Trust planning — complex options like discretionary trusts have different treatment before vs after enactment. An IFA should model your specific options.
Current rules apply — pension outside estate, no IHT on pension, beneficiaries pay income tax on withdrawals only if you were over 75 at death. The proposal takes effect (if enacted) from 6 April 2027 — it does not apply retroactively to deaths before that date.
Read HM Treasury's October 2024 consultation 'Inheritance Tax — pensions' and the draft Finance Bill 2024-25 clauses published July 2024. Both are on gov.uk. Watch the next Budget announcements (typically October/November and March) for updates on the proposal. The government has committed to further consultation on implementation details — so the final rules may differ from the draft. Subscribe to HMRC updates or follow a qualified estate planner for enactment news.
Accountant brief
Under my specific estate and beneficiary structure, what is my proposed IHT exposure if the October 2024 consultation is enacted as currently drafted?
Why this matters: Generic 'monitoring' answers are not enough. Your IFA should be able to quantify your exposure in pounds under the proposal as currently drafted — with assumptions clearly stated.
Have I used my late spouse's transferable nil-rate band correctly, and is my Residence NRB position confirmed?
Why this matters: Transferable NRB and RNRB together can shield up to £1M of estate. Many widowed clients have not claimed these correctly. Under the proposal, they become even more valuable as the total taxable estate grows.
Which planning option — drawdown, gifting, whole-of-life in trust, or ISA rebalancing — is most effective for my specific situation, and what is the cost?
Why this matters: Each option has different costs and timing advantages. Your IFA should model 3-4 options with specific numbers — not give generic advice. The best option for a 68-year-old widowed client differs from a 55-year-old couple's.
If the proposal is delayed or amended, does my plan still work — or is it only effective under the specific currently-drafted rules?
Why this matters: Plans that only work under one specific enactment are fragile. Good planning should work across multiple scenarios: enactment as drafted, enactment with amendments, delay, or withdrawal. Ask specifically.
Should I update my beneficiary nominations and expression of wishes before the proposal takes effect, and what is the optimal structure for my family?
Why this matters: Spouse beneficiaries stay exempt. Child beneficiaries trigger the proposed exposure. Discretionary nominations allow executors to optimise at the time of death. The right structure depends on age, health, and family circumstances.
Also relevant
If your total income (including pension drawdowns) is above £100,000, the personal allowance tapers at 60% effective rate between £100,000 and £125,140. Our 60% Tax Trap Engine shows the exposure and pension-based escape.
Check the 60% trap →Law bar
UK pension IHT proposal (October 2024 consultation, not yet law): unused DC pensions proposed to be brought into estate for IHT from 6 April 2027. If enacted: 40% IHT on pension value above nil-rate band (£325k individual, £650k couple), plus income tax on beneficiary withdrawals at marginal rate (up to 45%). Combined potential effective rate above 60%. Spouse exemption retained (IHTA 1984 s18). Residence NRB (£175k) retained. Current law (IHTA 1984) unchanged until Royal Assent. Status April 2026: PROPOSAL, not yet enacted. Planning window: now to 6 April 2027 if enacted.
HM Treasury — 'Inheritance Tax — pensions' consultation (October 2024) ↗
www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment
HMRC — Inheritance Tax overview ↗
www.gov.uk/inheritance-tax
HMRC — Inheritance Tax thresholds and interest rates ↗
www.gov.uk/government/publications/rates-and-allowances-inheritance-tax-thresholds-and-interest-rates
Inheritance Tax Act 1984 — current law ↗
www.legislation.gov.uk/ukpga/1984/51/contents
Machine-readable JSON rules ↗
/api/rules/pension-iht-trap
General information only. This page provides an illustrative rule-based estimate built from HMRC and GOV.UK guidance for April 2026. It is not tax, legal or financial advice. Tax rules can change — always verify current rates at GOV.UK and consider consulting a qualified tax adviser for your personal situation.