Pensions Join Inheritance Tax From April 2027: How the £1 Million Allowance Works for Couples

From 6 April 2027, most unspent defined contribution pension funds and pension death benefits will be brought within the value of a deceased person's estate for Inheritance Tax (IHT). While the headlines sound alarming, understanding how your Nil-Rate Bands and spouse exemptions work shows who will actually pay the 40% charge — and why outdated wills need checking before next April.

How the £325,000 and £175,000 allowances stack up

For 2026/27 (and frozen until 2031), every individual has two main Inheritance Tax allowances:

• Nil-Rate Band (NRB): £325,000 — applies to any assets in your estate.
• Residence Nil-Rate Band (RNRB): £175,000 — applies if you leave your main family home to direct descendants (children, stepchildren, or grandchildren).

Because unused allowances transfer automatically to a surviving spouse or civil partner on the first death, a married couple leaving a family home to their children typically has a combined tax-free ceiling of £1,000,000 (£650,000 NRB + £350,000 RNRB).

Why adding a pension pot creates a double cliff-edge above £2 million

As Setfords' analysis of the April 2027 rules illustrates, bringing an unspent pension pot into the estate on the second death affects families in two ways:

1. Direct 40% IHT above £1 million: A couple with an £800,000 home/savings estate and an £800,000 unspent pension pot currently owes £0 IHT because the pension sits outside the estate. From 6 April 2027, their combined estate becomes £1,600,000 — leaving £600,000 above the £1m allowance and creating a £240,000 IHT bill at 40%.
2. The £2 million RNRB taper: If adding a pension pushes the total estate on second death above £2,000,000, the £350,000 Residence Nil-Rate Band tapers away by £1 for every £2 over £2 million, creating an effective 60% marginal IHT trap between £2m and £2.7m.

Furthermore, IHT is allocated pro-rata across the pension and the non-pension estate — and beneficiaries who later draw money from an inherited pension where the holder died aged 75 or over can still face marginal Income Tax on the remaining pension withdrawals.

Checklist: four things to check before 6 April 2027

• Spousal exemption still protects the first death: Leaving your pension to your legal spouse or civil partner remains 100% exempt from IHT on the first death; the tax only bites when the estate passes to non-exempt beneficiaries (such as children or an unmarried partner).
• Check fixed charitable legacies in your will: Leaving at least 10% of your net estate to charity cuts the IHT rate from 40% to 36%. However, once your pension is added to the estate from April 2027, a fixed cash gift in an old will might fall below the new 10% mark unless updated to a percentage formula.
• Coordinate your pension nomination with your will: Pension death benefits are still distributed by pension trustees using your Expression of Wish form rather than your will.
• Consider gifting out of surplus income: Regular gifts made out of surplus after-tax income (that do not reduce your standard of living) are immediately exempt from IHT without waiting seven years.

How the UK compares internationally

Taxing unspent retirement accounts at death brings the UK closer to the US model. In the United States, inherited 401(k) and IRA balances are included in the gross estate for federal estate tax (though the US federal exemption sits much higher, above $13 million per person) and non-spouse beneficiaries must generally empty inherited IRAs within 10 years as taxable income.

Key Numbers

• Date unspent pensions enter IHT estates: 6 April 2027
• Standard Nil-Rate Band + Residence Nil-Rate Band per person: £325,000 + £175,000 (£500,000 total; £1m for a couple)
• Estate threshold where Residence Nil-Rate Band begins tapering: £2,000,000
• Standard vs Charity-reduced IHT rate (when 10%+ left to charity): 40% vs 36%

Sources

• Technical note: Inheritance Tax on pensions — GOV.UK
• How Will The April 2027 Pension Changes Affect Inheritance Tax? — Setfords
• How the 2027 Inheritance Tax changes affect your pension — PensionBee
• Estate Tax — US Internal Revenue Service (IRS)

Educational content only — not financial advice.