Tax & Residence

Pensions and Inheritance Tax from April 2027

By QROP Direct Editorial Team

Pensions and Inheritance Tax from April 2027

For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will form part of the deceased's estate for inheritance tax.

The first thing to say about that sentence is that it is settled. This is not a proposal, a consultation, or something to watch for in the next Budget. It was announced at the Autumn Budget 2024, carried through Finance Bill 2025-26, and it has a commencement date. Planning against it is planning against a known rule, which is a considerably more comfortable position than the one most tax questions leave you in.

The second thing to say is that the coverage has been broader than the measure. A great deal of what has been written implies that every pension is about to be taxed at 40%. That is not what the legislation does, and for anyone living outside the UK the decisive question is not the one most articles are answering.

What actually changes

The mechanism is a new section 150A of the Inheritance Tax Act 1984. It treats a member as being beneficially entitled to what HMRC calls the notional pension property held within a scheme — meaning the unused fund is valued as part of the estate rather than sitting outside it.

Three categories of scheme are named: registered pension schemes, qualifying non-UK pension schemes, and section 615(3) schemes. The measure covers both discretionary and non-discretionary arrangements, which matters because the discretionary structure of most UK schemes is precisely what has kept pension funds outside the estate until now.

Where a charge arises, it arises at the normal inheritance tax rate of 40% on the value above the available nil-rate band, currently £325,000. The pension does not get its own allowance; it joins everything else.

What is excluded

Two exclusions are stated explicitly in the policy paper, and both are more significant than their brief treatment in most commentary suggests.

Death in service benefits payable from a registered pension scheme are outside the scope of the change. For an employee whose main death provision is a lump sum through a workplace scheme, the position is materially unaltered.

Dependant's scheme pensions from a defined benefit arrangement, or from a collective money purchase arrangement, are also excluded. A survivor's pension from a final salary scheme is not caught by this.

The exemptions that survive

This is the point most often lost, and it changes the picture for a large proportion of readers.

The policy paper states that the existing inheritance tax principles providing exemption for death benefits passing to a surviving spouse or civil partner, and to registered charities, will be maintained.

A pension left to a spouse or civil partner is therefore not brought into charge by this measure. The change bites where benefits pass to children, to other individuals, or to non-exempt beneficiaries — which is exactly where a great many people have directed their pensions precisely because, until now, doing so was efficient.

That also explains why the numbers are smaller than the headlines. HMRC estimates that of around 213,000 estates with inheritable pension wealth in 2027 to 2028, roughly 10,500 will face an inheritance tax liability they would not previously have faced, and approximately 38,500 will pay more than they otherwise would. The great majority of estates holding pension wealth are not drawn into charge.

If you live abroad, the test is residence — not where you live

Here is the part that matters most to readers of this site, and the part where a good deal of existing guidance, including older material, is now simply out of date.

Until 6 April 2025, the scope of UK inheritance tax on non-UK assets turned on domicile, including the deemed domicile rule that applied after 15 of the previous 20 years of UK residence. That regime is gone. Section 44 of the Finance Act 2025 replaced it with a residence-based system, inserting section 6A into the Inheritance Tax Act 1984. A long-term UK resident is someone who has been UK resident for at least 10 of the previous 20 tax years. The years need not be consecutive, and residence is determined by the statutory residence test for years from 6 April 2013.

Applied to pensions, HMRC's technical note draws the line clearly:

• If you are a long-term UK resident, inheritance tax arises on notional pension property held in a registered pension scheme, a qualifying non-UK pension scheme or a section 615(3) scheme, regardless of where the scheme is situated or established. Moving the scheme abroad does not move it out of charge.
• If you are not a long-term UK resident, inheritance tax arises only on such property held in a scheme established in the UK. A scheme established outside the UK is outside the charge.

Read that twice, because it inverts a common assumption. The question is not where you live today, and it is no longer where you are domiciled. It is how many of the last twenty tax years you were UK resident, and where the scheme itself is established. Someone who left the UK two years ago after a long career there may well still be a long-term UK resident for these purposes. Someone who left fifteen years ago very likely is not.

Where QROPS sit, and where the position is not settled

The legislation names qualifying non-UK pension schemes. HMRC's technical note does not name QROPS explicitly.

In practice the two categories overlap considerably, and it would be easy to write a confident sentence here. We are not going to, because the published material does not support one and the consequences of being wrong are borne by the reader rather than the writer. Whether a particular overseas scheme falls within the section 150A definition is a question about that scheme's own constitution and status, and it needs to be answered on those terms with advice that has looked at the scheme documentation.

What can be said with confidence is the framing above: if you are a long-term UK resident, the location of the scheme does not rescue you, and the question of which category it falls into is less likely to be decisive. If you are not a long-term UK resident, whether the scheme is established in the UK becomes the central question. That is the right question to take to an adviser, and it is a more precise one than "does this affect my QROPS".

Who pays, and the fifteen-month problem

From 6 April 2027, personal representatives — not scheme administrators — are liable for reporting and paying any inheritance tax due on unused pension funds and death benefits.

That has a practical consequence worth planning for. Where personal representatives reasonably expect inheritance tax to be due, they can direct the pension scheme administrator to withhold benefits, and in that case beneficiaries will be able to access only 50% of the death benefits for up to 15 months from the date of death.

A beneficiary expecting a pension to arrive promptly may instead receive half of it, over a year later. Where a family's short-term liquidity depends on that money, the planning question is not only the tax but the timing, and it is a better conversation to have now than during probate.

It also shifts work onto the people least equipped to absorb it. Personal representatives are frequently family members rather than professionals, and they will need to establish the value of a pension fund, determine whether a charge arises, and decide whether to direct a withholding — often while dealing with an overseas scheme, a foreign administrator and a different time zone. Naming an executor who is capable of handling that, or making provision for professional help, is a small decision now and a considerable kindness later.

What the eighteen months are actually for

There is time here, and the worst use of it would be a hurried, irreversible decision taken on the strength of a headline.

Reviewing expression of wish and nomination forms costs nothing and is sensible regardless, particularly where they were completed on the old assumption that the pension sat outside the estate. Establishing whether you are, or are about to become, a long-term UK resident is the single most useful fact to determine, because almost everything else follows from it — and for someone approaching the ten-year threshold, the answer may change with time. Understanding the interaction with the nil-rate band, the residence nil-rate band and the rest of the estate is the only way to know whether any charge arises at all; for a great many readers it will not.

What we would caution against is stripping a pension in anticipation. Drawing funds out early to avoid a future inheritance tax charge can create an immediate income tax charge at your marginal rate, which may be the larger number, and it removes the fund from a tax-advantaged environment for whatever time remains. That trade-off has to be calculated for your circumstances, not assumed from the direction of policy.

This guide sets out the rule. It is not advice, and the interaction of residence, scheme type and estate composition is precisely the sort of question where the general answer and the right answer differ. If you would like yours worked through properly, that is a conversation worth having well before April 2027 rather than after it.