HMRC’s ‘two-tier’ inheritance tax plan for pensions — what it means for your estate

What is changing from April 2027

Until now, unused pension funds held in defined contribution (DC) pension schemes — the most common type of workplace and personal pension in the UK — have sat outside the deceased’s estate for inheritance tax purposes. This made pensions one of the most tax-efficient ways to pass wealth to the next generation: funds left unspent in a pension passed to beneficiaries free of inheritance tax, typically with the option to continue drawing from them or take them as a lump sum.

From April 2027, this changes. Unused DC pension funds at death will be treated as part of the taxable estate. The nil-rate band (£325,000) and residence nil-rate band (up to £175,000 for property left to direct descendants) will still apply to the total estate, but pension funds will now compete for that allowance alongside property, savings, and other assets rather than sitting outside the calculation entirely.

AJ Bell’s ‘two-tier’ criticism

AJ Bell’s retirement specialist Rachel Vahey has described HMRC’s approach as creating a “two-tier” system — and the criticism is technically specific. HMRC’s justification for including pension funds in the taxable estate relies on the argument that beneficiaries do not “own” the pension assets in the same way they own other inherited property. Yet by taxing those funds within the estate, HMRC simultaneously denies beneficiaries access to reliefs that are available when other assets are inherited — because the assets are being treated as part of the estate for tax purposes while being denied the reliefs that estate assets normally access.

The practical consequence, as reported by GB News and Headlinemoney, is that some families could face a combined inheritance tax and income tax hit of up to 64% on certain inherited pension pots. This arises when the pension fund is taxed as part of the estate at 40% and the beneficiary then pays income tax on withdrawals from what remains. HMRC published a technical note on the reforms in May 2026 ahead of the April 2027 start date.

What this means for estate planning

For the 55+ audience who have historically used pension contributions as a tax-efficient way to accumulate wealth that bypasses inheritance tax, the April 2027 change requires a fresh look at how the estate is structured. Pensions that were previously treated as “outside the estate” now need to be factored into the overall IHT calculation alongside property, savings, and investments.

This does not mean pensions become a bad place to hold assets. The tax treatment of pension contributions and growth remains favourable during accumulation. What changes is the position at death — and for those who planned their estate on the assumption that unused pension funds would pass to beneficiaries free of IHT, that plan needs updating.

The interaction between pension funds and property is particularly relevant for homeowners who hold significant equity in their home alongside a sizeable pension pot. Previously, the property was the part of the estate subject to IHT while the pension was not. After April 2027, both are in scope. The relative weight of each, and the reliefs available, affects the overall tax position — and whether any steps taken now (such as using some pension funds before death, or restructuring how property is held) would improve the outcome for beneficiaries.

Where property fits in

Property and pensions are the two largest asset classes for most older homeowners in the UK. The April 2027 change to pensions makes property relatively more significant in estate planning discussions — not because property becomes more tax-efficient, but because pensions become less so. Understanding how the home interacts with the rest of the estate — how the residence nil-rate band applies, whether equity release would change the taxable value of the estate, whether gifting from property equity is worth considering — is more relevant now than it was when pensions could be assumed to sit outside the IHT calculation. Verity Home covers the intersection of property and estate planning, and our guide to equity release and inheritance tax addresses how these interact.

For the broader pension and estate tax position, we would recommend speaking to an independent financial planner or solicitor who can take account of the full picture — including pension values, property equity, existing nil-rate band usage, and the impact of any changes on beneficiaries.