Inheritance tax on unused pension funds from April 2027 — what business owners should know

A significant change is coming for how pensions are treated on death. From 6 April 2027, most unused pension funds and death benefits will be brought into scope of Inheritance Tax (IHT), under a measure announced at Autumn Budget 2024 and now confirmed in draft legislation.

What changes from 6 April 2027?

Until now, most unused pension funds have sat outside the estate for IHT purposes, passing to beneficiaries free of Inheritance Tax. From 6 April 2027, unused pension funds and death benefits will be included in the value of the estate when working out whether IHT is due. The personal representatives of the estate will be liable for reporting and paying the IHT on the pension funds and benefits, and scheme administrators will withhold 50% of taxable benefits for up to 15 months where IHT is due. Death in service benefits from a registered pension scheme are excluded, as are exempt benefits, funds under £1,000 and continuing annuities.

The thresholds that matter

The standard IHT rate is 40%, charged only on the part of the estate above the nil-rate band. The nil-rate band is £325,000 and is frozen until 5 April 2031. Where a home passes to children or grandchildren, the residence nil-rate band of £175,000 (frozen until 5 April 2030) can lift the effective threshold to £500,000 — leaving 10% or more of the net estate to charity brings the rate down to 36%. Adding pension pots into these calculations means more estates will cross the thresholds than before.

Who is most affected?

Owner-managers and directors with large pension pots built up inside their companies are the most affected group. Many business owners have deliberately left pension funds untouched, drawing down other assets first precisely because pensions were IHT-free. From April 2027, that planning logic reverses: a £500,000 untouched pension fund could add up to £200,000 of IHT at 40% to the estate's bill.

Practical planning points

First, review your expression-of-wish (nomination) forms so your scheme knows who should receive the funds — the administration process is changing and clear nominations matter more than ever. Second, reconsider the sequencing of your retirement income: drawing on pension funds earlier and leaving other assets (such as ISAs or cash) to beneficiaries may now be more tax-efficient than the old 'spend everything else first' approach. Third, review how pensions sit alongside your will and any business relief planning, since the total estate value will now include them. Finally, take regulated financial advice before making changes — pension and IHT planning interact in complex ways, and this post is general information, not advice.