UK Pension Inheritance Tax 2027 — What Changes for Death Benefits

Starting 6 April 2027, unused UK pension balances will be brought into the taxable estate for inheritance tax purposes. This is a fundamental shift. Historically, UK pensions — including SIPPs, personal pensions, and other defined contribution schemes — sat outside the estate for IHT. They were one of the most effective tools for passing wealth tax-free to the next generation. That exemption is ending.

What Is Changing

Under the current rules (before 6 April 2027), when someone dies with money left in their defined contribution pension, the fund pays a death benefit to their nominated beneficiaries. If the member died before age 75, the payout was completely tax-free. If they died after 75, the beneficiary paid income tax at their marginal rate, but no inheritance tax. The pension was simply excluded from the IHT estate calculation.

From 6 April 2027, the unused pension balance becomes part of the deceased's estate for IHT purposes. If the total estate — including the pension — exceeds the nil-rate band (£325,000, or up to £500,000 with the residence nil-rate band), IHT at 40% applies to the excess.

The Double-Tax Trap

The pension death benefit may attract IHT. After any IHT charge is levied on the estate, the remaining pension fund may then be paid to the beneficiary as income. The beneficiary may pay income tax on it at their marginal rate — potentially 20%, 40%, or 45%.

Here is the arithmetic on a £200,000 pension fund for a beneficiary who is a higher-rate taxpayer (assuming the estate is above the nil-rate band):

• IHT at 40%: £80,000
• Remaining fund passed to beneficiary: £120,000
• Income tax at 40% on £120,000: £48,000
• Beneficiary receives: £72,000
• Effective combined tax rate: 64%

This is an illustrative outcome, not a universal rule: the actual result depends on the estate, pension scheme, and beneficiary's tax position.

Who Is Affected

British expats in Australia with UK pensions. Many British people who relocated to Australia left their defined contribution pensions in UK-based SIPP or personal pension wrappers. If they die within the scope of UK IHT (the 10-out-of-20-year residency test or the 10-year tail provision), their relevant unused UK pension balance will be part of the worldwide estate calculation from 6 April 2027.

Previously, even if the estate was within IHT scope, the pension was excluded. From 6 April 2027, it is not. For an expat who retired to Australia with a £300,000 SIPP and a UK property worth £400,000, the combined estate far exceeds the nil-rate band, and the pension fund that was once a protected asset now generates a substantial tax bill.

Families inheriting from parents who moved to Australia. Adult children in the UK who are non-tax dependants of the deceased face the worst combination: they do not qualify as tax dependants for Australian superannuation purposes (attracting 15–30% Australian withholding tax on any super death benefit), and they now face UK IHT plus income tax on the UK pension. Two separate pension systems, two separate tax exposures.

What Has Not Changed

Defined benefit pensions (final salary schemes, public sector pensions) are largely unaffected because the member does not own a fund — they receive an income stream that dies with them or passes to a surviving spouse at a reduced rate. There is no lump sum sitting in the estate.

The pension itself still passes outside probate. The 2027 change does not mean the pension fund is distributed through the will. The scheme administrator still pays the death benefit to the member's nominated beneficiaries based on the expression of wish form. What changes is that HMRC counts the value of that fund when calculating the estate's IHT liability.

Practical Implications for Cross-Border Families

For families managing the estate of a British person who died in Australia:

From 6 April 2027, the IHT return must include relevant pension values. When filing IHT400 with HMRC, the executor must declare relevant unused UK pension funds where the new rules apply. Omitting a relevant value can delay the filing and may lead to penalties.

The pension scheme needs death notification promptly. The scheme administrator must be notified of the death so they can provide the fund value to the executor for the IHT calculation. Delays in notification delay the entire estate settlement timeline.

The expression of wish form matters more than ever. The scheme pays the death benefit based on the member's nomination. If the nomination is out of date — naming an ex-spouse, for example — the scheme administrator has discretion over distribution, and the process takes longer.

The British Person Dies in Australia — Family Emergency Guide includes the IHT exposure worksheet that accounts for the 2027 pension changes, helping executors calculate the combined UK and Australian tax liability before filing with HMRC.