For decades, UK pension funds held a privileged position in estate planning. Assets inside a pension wrapper sat outside the taxable estate, could pass to the next generation free of inheritance tax, and could be drawn by beneficiaries at their own pace. For internationally mobile families this made UK pensions a cornerstone of long-term planning.
From 6 April 2027 that position changes.
What changes
Under rules confirmed by HM Revenue and Customs, most unused pension funds and pension death benefits will be brought within the value of the deceased's estate for inheritance tax purposes. Personal representatives become responsible for reporting them and for the tax due. Transfers to a spouse or civil partner remain exempt, as do qualifying payments to charities, and death in service benefits are excluded.
How the beneficiary is taxed
Whether income tax is also due depends, among other things, on the age of the pension holder at death, on the type of payment and on the tax position of the person who receives it. Where the holder dies aged 75 or over, withdrawals by the beneficiary are generally taxable as income at the beneficiary's own rate.
HMRC's technical note adds a point that is often missed: where inheritance tax has been paid on death benefits, the part of those benefits that corresponds to the inheritance tax paid does not count towards the beneficiary's taxable income. Inheritance tax and income tax are therefore not a simple sum of two rates.
How much, in practice
Any figure only makes sense with its assumptions stated. As an illustration: if a pension of 100 falls into an estate taxed at 40% and the beneficiary then draws the remaining 60 as income taxed at 45%, the combined charge is 67, not 85 and not 91. Higher combined figures have been published for specific situations, for example where the size of the estate also reduces the residence nil-rate band or where the beneficiary's own income sits in a band with a higher effective rate. Those outcomes exist, but they depend on a particular combination of facts and should never be presented as the general case.
Why cross-border families should look now
For families whose lives span more than one country the picture is more complex than for a purely UK-resident household. A pension holder living in Italy, Portugal, the UAE or elsewhere may hold assumptions about UK tax exposure that no longer apply. A beneficiary resident outside the UK may face UK inheritance tax on the pension together with local tax obligations on the same amount, with treaty relief that varies by country. Where the pension sits alongside companies, holdings or trusts, the order in which assets pass matters.
None of this is a reason to act in haste. It is a reason to put the pension on the same table as the rest of the structure and to have the whole picture read once, with the advisers who handle tax and succession.
Where Konfido fits
Konfido does not give tax, legal or succession advice. What we do is coordinate the operational side for families and structures that live across borders: the accounts, the payments and the foreign exchange around the people, their companies and the vehicles that connect them, with one point of contact who understands the whole picture. If the pension question is part of a wider rethink of where your money sits and how it moves, that is the conversation we are set up to have.
Sources
- HMRC, Inheritance Tax: unused pension funds and death benefits, https://www.gov.uk/government/publications/inheritance-tax-unused-pension-funds-and-death-benefits/inheritance-tax-unused-pension-funds-and-death-benefits
- HMRC, Technical note: Inheritance Tax on pensions, https://www.gov.uk/government/publications/inheritance-tax-on-pensions-technical-note/technical-note-inheritance-tax-on-pensions
- GOV.UK, Tax on a private pension you inherit, https://www.gov.uk/tax-on-pension-death-benefits
This note is general information, not advice. Figures are illustrative and depend on the assumptions stated. Rules may change before and after 6 April 2027.