Understanding the new Inheritance Rules regarding your pension

What has been announced?

In 2024, it was announced that unused pension funds and death benefits payable from a pension (called ‘notional pension property’) will form part of a person’s estate for inheritance tax purposes from 6 April 2027.

If someone dies before 6 April 2027, then the current rules will still apply even if the pension benefits are paid to their beneficiaries after 6 April 2027.

How do you calculate the notional pension property?

The new section 150A of the Inheritance Tax Act 1984 sets out that a person’s notional property includes all property held within: a registered pension scheme, a qualifying non-UK pension scheme, or a section 615(3) scheme less any excluded benefits.

The valuation of the notional pension for probate purposes should be the open market value at the date of death.

Leaving your pension to a spouse

Under the new rules, any pension left to a spouse will, in most cases, pass completely free of inheritance tax due to the spousal exemption.  The exception to this is where the deceased spouse is a long-term UK resident and the survivor is not.

Leaving your pension to charity

The Finance Act 2026 received Royal Assent on 18 March 2026, which encompasses the changes made to the Inheritance Tax Act 1984.

Under this, the UK government has now clarified that unused pension funds and notional death benefits will fall within the general component of a deceased person’s estate for the purposes of calculating whether more than 10 per cent of the estate was left to charity. Where at least 10% of a person’s net estate is left to a registered charity, their estate is taxed at a reduced rate of inheritance tax of 36% instead of 40%.

From 6 April 2027, any notional pension property that is paid to a qualifying charity will count toward the charitable giving conditions for the general component.

What further information will be released?

Guidance and further supporting materials to these changes should be published in time for April 2027. HMRC will need to provide interactive help tools for lay Personal Representatives, which will also need to be published by April 2027.

What does this mean in practice?

It is important that you ensure you consider the value of your pensions along with your other assets when estate planning or making your Will and that your pension nominations are made in consideration of the new rules and up to date.

The administration of otherwise straightforward estates will become more complicated and more people may, therefore, need professional assistance to complete the reporting formalities and ensure inheritance tax is paid from the correct place at the right time.

How can Ellis Jones help?

If you would like help or advice regarding your Will and/or estate planning from one of our specialist Wills, Trusts & Probate lawyers, please do not hesitate to contact us on 01202 525333.