Pension Funds to Count Towards Inheritance Tax from April 2027
UKPulse Money Desk
From April 6, 2027, pension savings will be included when calculating inheritance tax, regardless of the deceased's age. However, if pension funds are used directly to pay inheritance tax, they will not be subject to income tax.
- From April 6, 2027, money left in a pension will form part of an estate for inheritance tax calculations.
- If pension funds are used directly to pay inheritance tax, they will not be subject to income tax.
- If a beneficiary uses pension income to pay an inheritance tax bill, the income tax paid on this can be reclaimed.
From April 6, 2027, pension pots will be included as part of a deceased person's estate when calculating inheritance tax. This change applies regardless of whether the individual dies before or after the age of 75.
Samm Galloway, a Which? money expert, clarified that if a person dies over the age of 75, any money left in their pension is subject to income tax at the beneficiary’s marginal rate. However, if a person dies before the age of 75, their pensions can be inherited free of income tax.
Should an estate lack sufficient cash to cover an inheritance tax bill, pension savings can be used. HMRC plans to implement a direct payment system, allowing the proportional tax due to be paid directly from the pension pot. In such cases, if part of the pension is used directly to pay inheritance tax, it will not be subject to income tax. Alternatively, if a beneficiary takes pension income and uses it to pay an inheritance tax bill, the income tax on this can be reclaimed.
Why this matters: This change could affect estate planning for individuals with significant pension savings, as these funds will now contribute to the overall value of an estate for inheritance tax purposes.
What this means for you: If you have a pension, from April 2027, its value will be considered when calculating any inheritance tax due on your estate. However, if your pension is used directly to pay inheritance tax, that specific portion will not be subject to income tax.