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Inheritance Tax on Pensions from April 2027: HMRC Explains How the New Regime Will Work
Pensions have historically occupied a different place in estate planning from property, investments and other assets. That is about to change.
From 6 April 2027, most unused pension funds and pension death benefits will be brought within an individual’s estate for Inheritance Tax purposes. For people who have deliberately preserved pension wealth with the intention of passing it to the next generation, the assumptions underpinning that strategy may now need to be revisited.
The change itself has been known for some time, but we have been waiting for more clarity on how the new system will operate in practice when somebody dies.
HMRC’s Technical Note 2: Further information on Inheritance Tax and Pensions, published on 27 August 2026, provides important further detail following a recent update to the applicable regulations. It explains the information that will need to pass between personal representatives and pension schemes, how pension benefits can be temporarily withheld, how Inheritance Tax may be paid directly from pension funds and how personal representatives can ultimately obtain clearance from HMRC.
For families with significant pension wealth, it is an appropriate time to consider what the change means for their wider estate and succession planning.
At a glance: the April 2027 pension Inheritance Tax changes
| When do the rules change? | For deaths on or after 6 April 2027 |
| What is changing? | Most unused pension funds and pension death benefits will be brought into the deceased’s estate for IHT purposes. |
| Will every pension be affected? | No. Certain benefits, including death-in-service benefits from registered pension schemes and some dependant’s scheme pensions, remain outside the new regime. |
| Who will deal with the Inheritance Tax position? | Personal representatives will need to obtain information from pension schemes and factor pension wealth into the estate’s wider Inheritance Tax position. |
| What should individuals do now? | Review pension arrangements alongside Wills, other assets and wider succession planning before the new rules take effect. |
What is changing to Inheritance Tax on pensions from April 2027?
For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be treated as part of the deceased’s estate for Inheritance Tax purposes.
This represents a significant departure from the current treatment of many discretionary pension schemes, under which unused pension funds can generally sit outside the member’s estate for Inheritance Tax purposes.
Not every pension benefit will be brought within the new regime. Certain benefits will remain outside its scope, including death-in-service benefits payable from registered pension schemes and certain dependant’s scheme pensions.
The change does not mean that every pension will suffer Inheritance Tax. Pension wealth will instead form part of the wider calculation of the deceased’s estate, with the availability of exemptions, reliefs and nil-rate bands (NRBs) determining the ultimate tax position.
The standard Inheritance Tax nil-rate band is currently £325,000. A residence NRB of up to £175,000 may also be available where the relevant conditions are satisfied, although this begins to taper for estates worth more than £2 million.
Who will be affected by the new pension Inheritance Tax rules?
The changes are particularly relevant to individuals who have accumulated substantial pension wealth.
However, in some cases the impact may go beyond simply Inheritance Tax on the pension itself. Individuals whose estate is approaching the £2 million residence NRB taper threshold may also need to consider whether bringing pension wealth into the estate changes the availability of that allowance.
For example, take a married couple with assets in their estate (including their home) worth £2 million, and a pension of £1 million. If they leave everything to one another, and to their children on the second death, they would before the change have an Inheritance Tax liability of £400,000. However, once the pension is taken into account, they will have lost the residence NRB, and so the total Inheritance Tax liability will be £940,000 – an increase of £540,000.
How will pensions be valued and reported after death?
One of the biggest practical challenges created by the new regime is that pension assets and the rest of an estate will need to be considered together.
Personal representatives will need information about the deceased’s pension arrangements to establish the value of the estate and determine whether an Inheritance Tax account is required, and if so how much to report. They will also need to know who will benefit, in order to determine what exemptions might be available.
HMRC’s latest technical note sets out formal information-sharing requirements between personal representatives and pension scheme administrators.
Broadly, personal representatives will be able to request information including the value of what the legislation refers to as the deceased’s “notional pension property”. Pension schemes will generally have 28 days from receiving a valid request to provide the required information available to them. In a helpful change to the previous position, the latest regulations mean that a prospective personal representative (e.g. someone entitled to administer the estate on intestacy) is also entitled to request information.
However, if the pension scheme has not yet determined who will benefit from the pension, they are not required to report this until 14 days after the determination has been made. There is no specific deadline for the pension scheme to make this decision, which may delay the personal representatives being able to make an accurate Inheritance return.
The prompt identification of all of the deceased’s pension arrangements is therefore likely to become an increasingly important part of estate administration. Delays in identifying schemes, obtaining valuations or establishing beneficiaries could have knock-on consequences for the Inheritance Tax process.
Can Inheritance Tax be paid directly from a pension?
The new regime provides a mechanism known as the Pensions Direct Payment Scheme.
A valid payment notice can require a pension scheme administrator to pay Inheritance Tax, together with applicable interest, directly to HMRC from the relevant pension benefits.
Payment notices can be issued by personal representatives, someone acting on their behalf or pension beneficiaries. A beneficiary can only issue a notice in relation to their own Inheritance Tax liability and from pension benefits payable to them under that scheme. A prospective personal representative (for example, on an intestacy), while entitled to request information, is not entitled to issue a payment notice.
Once a valid payment notice has been received, the pension scheme administrator generally has 35 days to make the payment.
Where there is reason to believe that Inheritance Tax is or may be payable, a personal representative, prospective personal representative or someone acting on their behalf can issue a notice requiring the pension scheme administrator to withhold payments.
Broadly, the scheme can be required to withhold up to 50% of the relevant pension death benefit entitlement for up to 15 months after the end of the month in which the member died. However, withholding will not apply to excluded benefits or benefits passing to exempt beneficiaries. For example, where a surviving spouse or civil partner qualifies as an exempt beneficiary, their share should not be subject to withholding.
What happens if a pension is discovered after the estate has been administered?
Personal representatives can seek formal clearance from HMRC once the administration has reached an appropriate stage. Where clearance has been obtained, they may be discharged from personal liability for Inheritance Tax relating to pension benefits that are only discovered subsequently.
Personal representatives should only apply once the Inheritance Tax account and relevant schedules have been submitted, they believe all Inheritance Tax has been paid and estate values are considered final.
Where a previously unknown pension subsequently emerges after clearance, the pension beneficiary may instead become liable for the additional Inheritance Tax, although the personal representatives will still have reporting responsibilities.
Why the changes could alter existing estate-planning strategies
For many individuals, the existing tax treatment has encouraged a strategy of using other assets during retirement while preserving pension wealth for beneficiaries.
That strategy should not automatically be abandoned, but the assumption that preserving a pension until death will necessarily be the most tax-efficient succession strategy will need to be revisited.
For some individuals, the reforms may change the order in which different assets are used during retirement. For others, they may place greater emphasis on lifetime gifting or on how pension nominations interact with the wider estate plan.
Any planning needs to take into account the potential income tax consequences of receiving pension benefits, both for the pension holder themselves, if making withdrawals during their lifetime, as well as for beneficiaries where pension benefits are inherited. If potential beneficiaries are likely to pay different marginal rates of income tax, this might be something to take into account in deciding how to allocate different parts of an inheritance.
What should you do before April 2027?
There are still several months before the new rules take effect. For those likely to be affected, that provides a useful opportunity to review existing arrangements rather than waiting until April 2027.
1. Establish the value of your wider estate
Start by building an up-to-date picture of your overall position, including pension values, property, investments and other assets.
The significance of the pension changes cannot be assessed properly without understanding how the pension sits within the estate as a whole.
2. Review pension nominations alongside your Will
A pension nomination may remain important in determining who receives pension benefits, but the tax consequences of that decision may look different under the new regime.
Pension nominations should therefore be considered alongside the Will and wider succession plan rather than in isolation.
3. Model the potential Inheritance Tax position
For larger estates, comparing the expected Inheritance Tax position before and after 6 April 2027 can help identify how much additional exposure the reforms may create.
This may be particularly important where the estate is close to the £2 million residence nil-rate band taper threshold.
4. Assemble clear records
It will be important for your personal representatives to be able to promptly identify your pensions following death, in order to make contact with the relevant pension schemes. You can make this easier for them, and avoid the risk of pensions being overlooked, by ensuring that you have clear and up-to-date records available, in a format that will be accessible to them at the relevant time.
5. Avoid making pension withdrawals solely because of the Inheritance Tax changes
Taking money out of a pension can trigger Income Tax and may simply replace an asset within the pension with cash or investments that sit directly within the individual’s estate.
There is therefore no universal answer to whether someone should draw down pension wealth before April 2027. The appropriate strategy will depend on the individual’s circumstances.
How Quastels can help
The inclusion of pensions within the Inheritance Tax regime represents a significant change to the way many families will need to think about succession planning.
Our Private Wealth & Tax team can advise individuals and families on how the April 2027 pension reforms interact with their existing estate planning and can work together with your financial advisors to provide joined-up advice.
Reviewing the position before the new rules take effect can provide time to understand the potential exposure, model different outcomes and consider whether existing arrangements remain appropriate.
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When Should You Update Your Will? Key Life Events That Should Trigger a Review
Ensuring that your Will reflects your current wishes is of fundamental importance to you and your loved ones.
However carefully your Will has been drafted, it cannot account for every possible future change in your family circumstances, finances, residence or the law. As a general rule, it is sensible to review your Will every five years, or sooner if a significant personal, financial or legal change occurs.
Below, we have set out some of the key triggers that should prompt you to review your Will.
Does marriage or civil partnership affect your Will?
A marriage or civil partnership can affect the validity of your existing Will and may change how you want your estate to be distributed on death.
In England and Wales, getting married or entering into a civil partnership will usually cancel any Will made before that marriage or civil partnership, unless the Will was prepared in contemplation of it. Marriage and civil partnership can also unlock important inheritance tax exemptions, which may affect your wider estate planning.
Updating your Will at this stage helps ensure that your estate is passed on in accordance with your current wishes and that your estate planning reflects your new legal and family position.
Should you update your Will after divorce?
A divorce can also affect parts of your Will if your former spouse or civil partner is named as an executor or beneficiary. These provisions relating to a former spouse or civil partner may no longer take effect in the way they did before. This can leave uncertainty, particularly where they were appointed as an executor or where you and your former spouse prepared mirror Wills reflecting each other’s wishes.
Reviewing your Will following divorce helps ensure that your estate is still passed to your chosen beneficiaries and avoids complications in the administration of your estate.
Should you update your Will after having children or grandchildren?
Welcoming a child into your family is also a good time to review your Will.
This is particularly important if you wish to appoint guardians for your children or provide for minor beneficiaries under a trust structure.
If your existing Will was created before the next generation of your family arrived, you may want to reconsider how your estate will be passed down, who should be responsible for administering it, and whether any inheritance should be protected until children or grandchildren reach a suitable age.
This may be especially important for blended families or following second marriages.
Should you update your Will after a significant financial event?
Moving house, buying additional property, starting or selling a business, receiving an inheritance or experiencing a significant change in asset values can all affect the value or structure of your estate.
These events may affect how you choose to structure your Will, your chosen beneficiaries and any estate planning opportunities available to you.
For example, a business sale, property acquisition or inheritance may change the balance of your estate considerably. A Will that was appropriate when it was signed may no longer reflect how your wealth is now held or how you would want it to be passed on.
What happens if a beneficiary or executor dies?
If a beneficiary or executor dies, your Will may no longer work as you had intended when it was drafted.
You may need to replace these appointments to ensure that your estate is administered as efficiently as possible and that your chosen beneficiaries are still properly provided for.
This is particularly important where an executor had a specific role because of their relationship with the family, knowledge of the estate or professional expertise.
Should you update your Will if you move abroad or acquire overseas assets?
Moving country, acquiring or giving up citizenship in the UK or abroad, or owning assets in other jurisdictions can raise succession and tax issues both at home and overseas.
Where international considerations apply, it is sensible to review your Will to ensure it works alongside domestic and international laws, tax rules and any overseas estate planning documents.
This may be particularly relevant for internationally mobile families, individuals with overseas property or assets, family members in different countries or cross-border business interests.
Can changes in the law affect your Will?
Significant changes in the law can also affect your existing Will and any tax planning you may have in place.
For example, recent changes replacing domicile with long-term residence as the determining factor for the scope of UK inheritance tax may affect families with cross-border connections. A Will that was tax-efficient when signed may not remain so after significant legal or tax changes.
This is why it is important to review your Will not only when your personal circumstances change, but also when the legal or tax landscape changes.
What should you consider when reviewing your Will?
When reviewing your Will, it is helpful to consider whether it still reflects:
- who you want to benefit from your estate;
- who should act as your executors;
- who should act as guardians for minor children;
- whether any beneficiaries should inherit outright or through a trust;
- whether your estate has changed significantly in value or structure;
- whether you own assets overseas;
- whether your inheritance tax planning remains appropriate;
- whether there are any family circumstances that may create uncertainty or future dispute.
A regular review of your Will gives you peace of mind that it remains practical, tax-efficient and aligned with your wishes.
How Quastels can help
Quastels’ Private Wealth & Tax team advises individuals, families, trustees, executors and internationally mobile clients on Wills, succession planning, inheritance tax, trusts, probate and cross-border estate planning.
If any of these events apply to you now or in the future, we would be happy to arrange a call to discuss your circumstances and review whether your existing Will continues to reflect your wishes.
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Dilapidated, Derelict, or Just in Need of TLC? First-tier Tribunal Finds Severely Deteriorated House Was Not “Residential Property” for SDLT Purposes
Quastels LLP is pleased to have acted for the successful Appellant in Oakwood Great Oak Ltd v HMRC [TC/2024/03198], a decision of the First-tier Tribunal (Tax Chamber) issued on 5 August 2026. The case is an important addition to the growing body of case law on when a building ceases to be “suitable for use as a dwelling” for the purposes of Stamp Duty Land Tax (SDLT), and provides welcome clarification on how the Court of Appeal’s recent guidance in Mudan should be applied to severely deteriorated properties.
Background
The case concerned the SDLT treatment of the purchase by our client, Oakwood Great Oak Ltd, of “Great Oak”, a substantial detached house on Prowse Avenue, Bushey Heath, for £2,400,000 on 29 November 2022.
The Appellant filed its SDLT return on the basis that the transaction was non-residential. HMRC disagreed, opened an enquiry, and ultimately issued a Closure Notice concluding that the property was “residential property” within section 116(1)(a) of the Finance Act 2003 (FA 2003), a conclusion it maintained on review, prompting the Appellant’s appeal to the Tribunal.
The distinction matters a great deal in practice. If a property is “residential property”, SDLT is charged at higher residential rates (and, in the case of corporate purchasers, potentially at higher flat rates for high-value residential acquisitions, or an additional surcharge in certain cases). If the property is instead non-residential (because it is no longer suitable for use as a dwelling) the lower, non-residential rates apply. For a derelict or heavily dilapidated property acquired as a development opportunity, the difference in tax exposure can be very substantial.
The Legal Test: Section 116 FA 2003 and the Mudan Guidance
Section 116(1)(a) FA 2003 defines “residential property” as “a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use”. The definition of “dwelling” in Schedule 4ZA FA 2003, which governs the higher rates chargeable on additional dwellings, is in the same terms, save that it applies to a “single” dwelling.
A recent authority on this test is the Court of Appeal’s decision in Mudan v HMRC [2025] EWCA Civ 799, upholding the Upper Tribunal’s decision in Mudan v HMRC [2024] UKUT 307 (TCC). In Mudan, the Court of Appeal firmly rejected the argument that a property must be capable of immediate occupation to be “suitable for use as a dwelling”, holding that this would improperly read words into the statute that are not there.
Instead, the Court of Appeal held that the criteria are focused on the “fundamental characteristics and nature” of the building, rather than a snapshot assessment of habitability at the effective date of the transaction. Where a building has previously been used as a dwelling, a key question is whether or not it has lost that character by the relevant date.
The Upper Tribunal in Mudan (endorsed on appeal) set out seven considerations relevant to assessing the impact of necessary works on suitability for use as a dwelling:
- whether the building was previously used as a dwelling;
- where it sits on the range between a “desirable house” requiring updating and an “empty shell”;
- whether the required works are aimed at habitability rather than mere improvement;
- whether identified defects are capable of remedy without being so hazardous as to prejudice their own viability, or without compromising structural integrity;
- whether occupation would be unsafe;
- that whether a repair is ‘minor’ or ‘fundamental’ is relevant but not particularly informative; and
- ultimately, whether the works needed mean the building no longer has the characteristics of a dwelling.
Critically, the Upper Tribunal and Court of Appeal both stressed that this is a multifactorial, evaluative assessment and that no single factor, including the theoretical possibility of fixing defects, is determinative.
The Facts
Great Oak was originally built in the 1930s as a substantial detached dwelling house, with a two-storey extension added in the 1960s, and had been used as a dwelling for many years. By the effective date of the transaction, however, it had stood vacant for approximately three to four years.
The Tribunal found that the property had deteriorated substantially during that period of vacancy, with widespread damp and mould, water ingress, cracking, deteriorated internal finishes, boarded or damaged windows, and defects affecting building services and utilities, alongside signs of vandalism or unauthorised access.
Competing structural evidence was before the Tribunal: reports commissioned by the Appellant identified significant damp, cracking and structural movement and concluded the property was not habitable in its then condition, while a report commissioned independently by the local planning authority took a more optimistic view of the main house but nonetheless identified serious concerns regarding the rear terrace, retaining wall, and the two-storey extension.
Perhaps the most significant feature of the case was the extensive presence of asbestos-containing materials throughout the property, including in the basement, service areas and roof void, falling within the highest risk category and necessitating licensed contractors, negative-pressure enclosures, air monitoring and clearance certification before safe occupation, repair or demolition could proceed. Crucially, the Tribunal found that removing the asbestos-containing materials would itself require the removal of associated services and building elements, generating a further need for substantial reinstatement works before the property could again function as a dwelling.
A costing report obtained by the Appellant estimated remediation costs at approximately £2.25 million, a figure the Tribunal treated with some caution as to precision, but accepted as persuasive evidence of the exceptional scale of intervention that would have been required.
The Parties’ Positions
The Appellant argued that the cumulative effect of the structural defects, extensive deterioration and widespread asbestos contamination meant the property had ceased to possess the characteristics of a dwelling and had, in substance, become a development site requiring demolition. Counsel submitted that the assessment of “viability” endorsed in Mudan and Ridgway could not sensibly exclude financial and practical considerations, and warned that HMRC’s approach (under which a building remains residential unless it has physically collapsed or repair would itself cause collapse) would create a perverse incentive to demolish buildings before completion.
HMRC submitted that economic viability formed no part of the statutory test, and that a defect which was capable of remedy was “fixable” regardless of cost. HMRC maintained that the main house remained structurally sound, that the asbestos had in fact been successfully remediated, and that the property therefore retained its residential character throughout.
The Tribunal’s Decision
The Tribunal allowed the appeal, finding that the property was not “residential property” in accordance with section 116(1)(a) FA 2003 at the effective date.
The Tribunal accepted that a number of factors favoured HMRC’s position: the property had been designed, built and used as a dwelling for many years, remained physically standing, and retained a recognisable residential layout at the effective date. The Tribunal also found that the property was not at imminent risk of structural collapse and that repair was not physically impossible.
However, the Tribunal’s reasoning turned on a crucial point of principle. It rejected the proposition that the statutory question is answered simply by asking whether a property is theoretically capable of repair, observing that: “Almost any standing structure can be said to be capable of repair if one assumes the availability of unlimited time, resources and expenditure”, and that such an approach would risk depriving the statutory test of any meaningful content. Instead, the practical consequences and exceptional scale of the required works were relevant to the ultimate question of whether the building retained the characteristics of a dwelling. The Tribunal placed particular weight on the asbestos contamination, finding that its remediation would not simply have made the property safe while leaving it otherwise intact, but would itself have generated a further need for substantial reinstatement works before the property could again function as a dwelling. The Tribunal emphasised that these factors had to be considered cumulatively rather than in isolation: viewed individually, no single defect was decisive, but viewed together, they presented a materially different picture. The Tribunal weighed all the relevant factors and concluded that the cumulative effect of all the issues with the property meant it had “crossed the line” contemplated in Mudan and was no longer suitable for use as a dwelling.
For any other questions on the case, or tax appeals more generally, please contact the Private Wealth and Tax team at Quastels.
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