Pensions, inheritance tax and the April 2027 reforms: a looming estate administration problem

The long‑anticipated reforms to the inheritance tax (IHT) treatment of pensions, effective from 6 April 2027, represent a fundamental shift in UK estate planning. For many years, unused defined contribution pension funds have sat outside an individual’s estate for IHT purposes, allowing them to be used as an incredibly tax-efficient intergenerational planning tool. That position will no longer apply.

The core change

From April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased’s estate for IHT purposes.

This reform, confirmed in the Finance Act 2026, is stated as being expressly intended to curb the use of pensions as a vehicle for tax‑free wealth transfer and to realign them with their original purpose of funding retirement.

In practical terms, pension wealth will be treated as part of the deceased's taxable estate and will be chargeable to IHT at up to 40% (subject to available nil rate bands). The change applies broadly to unused defined contribution pots and most lump‑sum death benefits. Existing reliefs – most notably the spousal exemption – will continue to apply.

The structural tension: tax inside the estate, assets outside it

Although pensions will be included within the IHT calculation, they will often continue to fall outside the estate for succession purposes.

This reflects an enduring feature of UK pension arrangements: in many cases, death benefits are paid under discretionary trusts or scheme rules, meaning that the pension does not pass in accordance with the will (or intestacy) of the person who has died, and that the personal representatives (executors where there is a will and administrators where there is not) do not control or receive the asset.

The result is a structural mismatch. From April 2027, the pension is included in the estate value for IHT purposes. For succession purposes, the funds often pass outside the estate. Control of the funds typically sits with the scheme trustees or with the beneficiaries of the holding, yet the liability for the IHT falls on the personal representatives. This divergence underpins the main practical difficulty.

The executor’s problem: liability without liquidity

Under the new regime, personal representatives will be responsible for reporting on and paying IHT on pension assets, even where they do not control those assets. This creates an acute liquidity and enforcement problem.

1. No automatic access to funds

Where pension benefits are held in discretionary schemes, personal representatives may have no entitlement to receive the death benefit, to administer with the other assets of the estate. Yet they remain liable for the tax attributable to that benefit. This is a marked departure from the traditional model of estate administration, in which tax liabilities are broadly aligned with assets under the personal representatives' control.

2. Dependence on beneficiaries

In many cases, personal representatives will be dependent on the recipients of pension death benefits to contribute funds to satisfy the IHT liability. That dependency introduces several risks:

• Timing risk: IHT is generally due within six months of death, whereas pension distributions may be delayed pending trustee decision‑making.
• Enforcement risk: there may be no straightforward mechanism to compel beneficiaries to contribute, particularly where benefits are discretionary.
• Relationship risk: disputes may arise where beneficiaries resist funding tax on an asset they receive directly.

3. Personal liability exposure

Personal representatives are personally liable for the correct reporting and payment of IHT. The inclusion of pension wealth therefore exposes them to liability for assets that may be difficult to identify, value or access.

This is particularly problematic where:

• Reporting: the deceased held multiple pension arrangements, or where records are incomplete or difficult to obtain; or
• Payment: the value of the estate is modest, but the pension is large and the IHT liability therefore exceeds the funds available in the estate.

Disputes between beneficiaries

To date, the tax efficiency of pension arrangements has meant it is not uncommon for pension benefits to be directed towards children, with the estate itself passing to the surviving spouse. This structure has always carried some risk of dispute, particularly where there are children from a previous relationship and a mismatch in value between the two pools of assets.

Under the new rules, however, that risk is likely to increase. In particular, difficulties may arise where the spouse’s share (that is, the estate) bears the IHT attributable to the children’s share (namely, the pension), if the personal representatives cannot access pension funds and the beneficiaries of those funds may be unwilling to contribute.

In those circumstances, a surviving spouse may consider a claim under the Inheritance (Provision for Family and Dependants) Act 1975. However, it remains difficult in practice to bring pension benefits within the scope of such claims, and the need to resort to litigation is likely to be far from what was intended when the planning was put in place.

The result may be both significant family disharmony and, in some cases, an effectively disinherited surviving spouse. This undermines both the testator’s original estate planning and the policy rationale underpinning the spousal exemption, namely that assets should be capable of passing to a surviving spouse free of IHT.

Partial mitigation: payment mechanisms

HMRC has proposed mechanisms intended to ease the position, including allowing personal representatives to direct pension scheme administrators to withhold funds or pay IHT directly to HMRC.

These include withholding up to 50% of benefits for a limited period and facilitating direct payment of IHT from pension funds. However, these mechanisms are not a complete solution. They depend on timely cooperation between personal representatives and scheme administrators and may delay distributions to beneficiaries. They also do not eliminate the fundamental issue that personal representatives bear responsibility for tax on assets outside their control.

Wider planning implications and what should be done now

The reforms will force a re‑evaluation of long‑standing planning strategies. The familiar approach of preserving pensions and spending non‑pension assets first will be less attractive. Greater emphasis will be placed on liquidity planning within estates to ensure IHT can be paid without reliance on third parties. There will also be increased scrutiny of death benefit nominations, lifetime gifting strategies and the choice of executors, given the heightened administrative burden.

Importantly, practitioners must now consider not only tax efficiency, but also administrative practicality and risk allocation. In addition, the inclusion of pension assets within the taxable estate may complicate the operation of wills that include a charitable gift of at least 10% of the net estate to secure the reduced 36% rate of IHT, as the enlarged estate for IHT purposes may alter both the baseline calculation and the quantum of the charitable legacy required to qualify for the reduced rate.

There is an inherent tension between taking advantage of the current favourable tax treatment of pensions and planning for a future in which those benefits may no longer apply. Individuals should therefore review their existing arrangements now and, where appropriate, develop proposals to ensure their testamentary wishes are ultimately carried out once the changes come into force.

Those named, or considering acting, as executors should also think carefully before accepting the role where a death may occur after 6 April 2027. In such cases, the administration of the estate may give rise to additional practical difficulties and potential personal liability

Early planning – particularly around liquidity and coordination between estate and pension assets – will be essential to mitigate what is likely to become one of the most contentious aspects of post‑2027 estate administration.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2026