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Key takeaways from this article
- The date of death determines whether the old or new IHT rules apply, with dual processes operating after 6 April 2027.
- Most unused pension death benefits will be subject to IHT from 6 April 2027 unless specifically excluded.
- Exempt beneficiaries do not remove benefits from the National Pension Property (NPP) calculation but can reduce the IHT payable.
- The new rules interact with existing IHT reliefs, exemptions and lifetime transfer of value provisions, so careful analysis is required.
Background
The provisions bringing pensions into the scope of IHT can be found in the Finance Act 2026 and supporting regulations. From 6 April 2027, the rules apply to members of:
- a UK registered pension
- a qualifying non-UK pension scheme
- a section 615(3) pension scheme (an old form of occupational scheme primarily designed for UK employers with overseas employees).
For long term UK residents, IHT arises on the above regardless of where the scheme is situated. Non-long-term UK residents will not be charged IHT on pension schemes which are established outside the UK.
1. What are the new inheritance tax provisions?
It no longer matters whether a pension scheme has discretionary powers over the payment of death benefits (see our separate article on this). Most unused pension death benefits will be included in the IHT assessment, unless a specific exclusion applies.
The legislation introduces the concept of NPP. Under these rules, the deceased member is treated as beneficially entitled to the value of their pension death benefits immediately before death. Importantly, they are not treated as owning the underlying pension assets themselves. This distinction is important because certain inheritance tax reliefs could have applied if the underlying assets had been owned directly by the deceased. However, as the inheritance tax charge applies to the value of the NPP rather than to the underlying assets themselves, those reliefs are not available.
NPP includes death benefits payable from both money purchase and defined benefit pension arrangements.
2. Which pension death benefits are included in NPP?
The following death benefits are included within NPP:
Money Purchase death benefits in scope
- uncrystallised funds lump sum death benefits
- drawdown lump sum death benefit
- flexi-access drawdown lump sum death benefit
- dependant’s drawdown
- dependant’s/nominee’s/successor’s flexi-access drawdown
- dependants*/nominees*/successor’s annuity
- dependants/nominees/successor’s short-term annuity
- the capitalised value of any remaining guarantee period
- annuity protection lump sum death benefit.
*excludes annuities established during the members lifetime as a joint annuity
Defined benefit death benefits in scope:
- the capitalised value of any remaining guarantee period
- pension protection lump sum death benefit
- defined benefit lump sum (which is not classed as a death in service benefit)
Inheritance tax can apply more than once.
The legislation does not provide any relief where pension death benefits have already been subject to inheritance tax. This means benefits that have been taxed on one death may be taxed again if they later form part of another individual's NPP.
3. What is excluded from NPP?
The following pension death benefits are excluded from the new rules.
Benefits where the member died before 6 April 2027:
- Pension death benefits where the member died before 6 April 2027 and the scheme administrator or trustees have discretion over who receives the benefits.
Money Purchase death benefits excluded:
- death in service benefits
- joint life annuities where a dependant’s or nominee’s annuity was purchased with the member during their lifetime
- charity lump sum death benefits.
Defined benefit death benefits excluded:
- death in service benefits
- dependant’s scheme pension
- trivial commutation lump sums paid in respect of a dependant’s scheme pension.
4. What reliefs are available for NPP?
As NPP does not treat the deceased member as owning the underlying pension asset, many of the IHT reliefs available for non-pension assets are unavailable.
Not available:
- Loss on sale relief - does not apply to NPP because it is not a “qualifying investment” or an “interest in land” under sections 178(1) or 190 (1) IHTA 1984.
- Business Property Relief and Agricultural Property Relief – does not apply as the deceased member is not treated as owning the NPP.
- Payment on instalments over 10 years is not applicable as NPP is not “qualifying property” under section 227(2) IHTA 1984.
Available:
- Quick Succession Relief is available.
Further details can be found in HMRC technical note section 11.2 issued May 2026.
5. Beneficiaries exempt from IHT
Once the value of the NPP has been established, it is added to the value of the rest of the estate. Inheritance tax is then calculated, and the proportion of the tax attributable to the NPP is apportioned between the beneficiaries of the pension death benefits. Certain beneficiaries qualify for an exemption. Where this applies, the inheritance tax attributable to their share is not payable, even though their benefits remain included in the NPP calculation.
Exempt beneficiaries include:
- spouses and civil partners, where they are long-term UK residents*
- registered clubs
- gifts made to political parties
- gifts made to housing associations
- gifts made for national purposes
- maintenance funds for historic buildings.
*Where the surviving spouse or civil partner is not a long-term UK resident, the spouse exemption is capped. The maximum exempt amount is £325,000 plus any unused nil rate band available from the deceased. The amount of additional exemption depends on how much of the deceased's nil rate band remains after taking account of assets passing to other non-exempt beneficiaries.
John dies leaving £250,000 to his children and £600,000 to his spouse, who is not a long-term UK resident. The £250,000 passing to the children uses £250,000 of John's £325,000 nil rate band, leaving £75,000 unused. The maximum spouse exemption is therefore £400,000 (£325,000 + £75,000). Of the £600,000 left to the spouse, £400,000 is exempt and the remaining £200,000 is chargeable to inheritance tax.
6. How to establish the IHT due under a pension scheme
Once the value of any NPP has been established, it is added to the deceased's general estate component for inheritance tax purposes. The legal personal representatives (LPRs) will then need to:
Step 1: Add the NPP value to the rest of the estate.
Step 2: Deduct any allowable debts, expenses and reliefs.
Step 3: Apply any available nil rate band (NRB) and residence nil rate band (RNRB), and calculate the total inheritance tax liability.
Step 4: Determine how much of the inheritance tax liability is attributable to the NPP.
Step 5: Apportion the NPP-related inheritance tax liability between the beneficiaries of the pension death benefits.
Step 6: Apply any available exemptions. Where a beneficiary is exempt, the inheritance tax attributable to their share is not payable.
Bob, a widower, dies aged 83 leaving one adult child.
- House: £400,000
- Outstanding mortgage: £100,000
- Other assets: £75,000
- Notional pension property (NPP): £775,000
- Full transferable NRB and RNRB available from his late spouse
- Pension expression of wishes: 95% to his child and 5% to a charity
- The scheme administrator follows the expression of wishes
Step 1: Add the NPP value to the rest of the estate
|
Asset |
Value |
|
House |
£400,000 |
|
Other assets |
£75,000 |
|
NPP |
£775,000 |
|
Total estate |
£1,250,000 |
Step 2: Deduct any allowable debts, expenses and reliefs
|
Item |
Value |
|
Total estate |
£1,250,000 |
|
Less mortgage |
(£100,000) |
|
Net estate |
£1,150,000 |
Assume there are no other deductible debts, expenses or reliefs.
Step 3: Apply any available NRB and RNRB and calculate IHT
|
Calculation |
Value |
|
Net estate |
£1,150,000 |
|
Less NRB and RNRB |
(£1,000,000) |
|
Chargeable estate |
£150,000 |
|
IHT at 40% |
£60,000 |
Step 4: Calculate how much of the IHT is attributable to the NPP
The NPP represents £775,000 of the £1,250,000 estate.
£775,000 ÷ £1,250,000 = 62%
Therefore, 62% of the IHT liability is attributable to the NPP:
£60,000 × 62% = £37,200
Step 5: Apportion the IHT due on the NPP to each beneficiary
|
Beneficiary |
Share of NPP |
IHT attributable |
|
Child |
95% |
£35,340 |
|
Charity |
5% |
£1,860 |
|
Total |
100% |
£37,200 |
Step 6: Apply any exemptions
The charity is an exempt beneficiary. As a result, the £1,860 attributable to its share does not have to be paid.
|
Beneficiary |
IHT attributable |
Exempt? |
IHT payable |
|
Child |
£35,340 |
No |
£35,340 |
|
Charity |
£1,860 |
Yes |
£0 |
|
Total IHT payable in respect of the NPP |
£35,340 |
Outcome: The total inheritance tax liability is £60,000, of which £37,200 is attributable to the NPP. After applying the charity exemption, £35,340 is payable in respect of the pension death benefits. The IHT initial attributable to the charity falls away i.e. it is not payable because of the exemption.
7. Other considerations
The introduction of the new pension inheritance tax regime from 6 April 2027 does not alter the existing rules on lifetime transfers of value. Nor has HMRC updated its guidance in this area.
Therefore care is needed where an individual in ill health transfers pension benefits, increases pension contributions, or assigns death benefits into trust. In certain circumstances, these actions can constitute a lifetime transfer of value for inheritance tax purposes.
This is particularly important because the exemptions available under the NPP regime do not apply. For example, unlike pension death benefits within NPP, there is no spouse or civil partner exemption where a lifetime transfer of value arises.
Approver: Quilter August 2026
Q 01394/206/18432
Need more help?
Speak to our experienced team. You can reach them Monday to Friday, 8.30am to 4.30pm, by either calling 02380 726 010 or emailing:
- Pensions technical queries – pensionstechnical@quilter.com
- Life and trust technical queries - taxandtrusts@quilter.com
The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.