Pensions and Inheritance Tax From 2027 — What Executors Need to Know Now

If you're currently administering an estate, or helping a parent plan ahead, there's a significant change on the horizon that catches most families by surprise: from 6 April 2027, unused pension funds will, for the first time, count towards the value of an estate for inheritance tax purposes. Combined with frozen tax-free thresholds that have been static for years, more families than ever are finding themselves with an inheritance tax bill they didn't expect. Here's what's actually changing, and what it means if you're dealing with an estate right now.

What's Changing From April 2027

Under current rules, most pension pots sit outside your estate for inheritance tax purposes — one of the reasons pensions have long been used as a tax-efficient way to pass on wealth. That changes for deaths on or after 6 April 2027. From that date, unused and uncrystallised pension funds, along with most pension death benefits, will be added to the value of the estate and taxed at the standard 40% rate above the available thresholds.

The One Important Exemption

There is a significant carve-out: pensions passing to a surviving spouse or civil partner remain exempt, as do pensions left to a registered charity. It's pensions passing to children, grandchildren, or other beneficiaries that will be drawn into the calculation. For blended families, second marriages, or anyone whose pension nomination hasn't been reviewed in a few years, this is worth checking now rather than after the fact.

Why the Frozen Thresholds Make This Worse

Inheritance tax is charged at 40% on the value of an estate above the tax-free threshold. For most people that's the nil-rate band of £325,000, plus the residence nil-rate band of up to £175,000 if a main home is passed to direct descendants — a combined £500,000 for many estates, or up to £1 million for a married couple using both allowances. The problem is that these thresholds have been frozen since 2021, and the Autumn Budget 2024 extended that freeze to at least April 2030. Property and asset values have kept rising over the same period. The result is what's often called "fiscal drag" — more estates are pulled into paying inheritance tax every year, not because anyone got richer in real terms, but because the threshold hasn't moved while everything else has.

What This Looks Like in Practice

A family home in many parts of the UK, combined with modest savings and a pension pot that would previously have passed tax-free, can now tip an ordinary estate over the threshold in a way it simply wouldn't have a decade ago. Add the 2027 pension change on top, and estates that were never considered "wealthy" in any meaningful sense may face a tax bill that comes as a genuine shock to grieving beneficiaries.

What This Means If You're Administering an Estate Now

If the death occurred before 6 April 2027, the pension changes don't apply to that estate — but it's still worth understanding the direction of travel, particularly if you're also handling estate planning for a living relative. If you're valuing an estate for probate purposes today, get an accurate, defensible valuation of any property involved. HMRC scrutinises property valuations closely, especially where they affect whether IHT is due at all, and an informal estimate from a family member is a common source of both underpayment problems and probate delays.

If the Estate Includes a Property

Where IHT is due, it generally has to be paid before probate is granted — which creates a genuine cash flow problem when most of an estate's value is tied up in a house. Executors can use the "loan facility" some banks offer against the estate, HMRC's instalment option for property, or arrange a sale that completes quickly enough to cover the liability without missing statutory deadlines. Whichever route you take, it's far easier to plan for if you get a realistic property valuation and a clear picture of the likely tax position early, rather than discovering the gap once the clock is already running.

Frequently Asked Questions

Do pensions count towards inheritance tax?

Not currently, in most cases. But from 6 April 2027, unused and uncrystallised pension funds and most pension death benefits will be added to the value of an estate for inheritance tax purposes, taxed at 40% above the available thresholds. Pensions passing to a surviving spouse, civil partner, or registered charity remain exempt.

What is the inheritance tax threshold in 2026?

The standard nil-rate band is £325,000, plus a residence nil-rate band of up to £175,000 if a main home passes to direct descendants, giving many estates a combined £500,000 tax-free allowance (up to £1 million for a married couple using both allowances). These thresholds have been frozen since 2021 and will stay frozen until at least April 2030.

Do I have to pay inheritance tax before probate is granted?

In most cases, yes. Inheritance tax generally needs to be paid, or arrangements made to pay it, before HMCTS will issue the grant of probate. This can create a cash flow problem when most of an estate's value is tied up in a property, which is why many executors use HMRC's instalment option or arrange a property sale that completes quickly.

Can I sell an inherited property before probate is granted?

You can market a property and agree a sale before the grant of probate is issued, but you generally cannot complete the sale until probate has been granted, since the executor needs legal authority to transfer the property. Getting an accurate valuation and starting the conversation early can prevent this from adding further delay.

Frozen thresholds are already pulling more ordinary estates into inheritance tax than at any point in recent memory, and the 2027 pension change will add another layer for many families. If you're dealing with probate now, or helping plan for a relative's estate, it's worth getting proper advice on where things stand rather than assuming the old rules of thumb still apply.