Pension pots get standalone 36% IHT charity test from April 2027

Executors and private-client advisers get two easements in the inheritance tax on pensions regime that starts on 6 April 2027TAX.TAX From that date most unused pension funds and pension death benefits are brought within the deceased person's estate for inheritance tax purposesGOV, and the government has now accepted two changes pressed for by the Chartered Institute of TaxationTAX.

The first concerns the reduced 36% rate. Where at least 10% of a person's net estate is left to charity, Schedule 1A to the Inheritance Tax Act 1984GOV reduces the tax rate on death charges to 36%GOV.GOV Pension assets will now be treated separately from the rest of the estate when testing whether enough has been left to charity for that reduced rate.TAX The separation prevents a large pension pot from swamping the charity calculation for the non-pension estate, or vice versa. The person administering the estate keeps a choice: they may elect to include the pension assets with the rest of the estate instead, where aggregation produces the better inheritance tax resultTAX.

The second change tackles payment mechanics. Administering an estate that includes pension property requires coordination between personal representatives, pension scheme administrators and beneficiaries, with withholding notices and a pensions direct payment scheme forming part of the collection machinery. People who have not yet been formally recognised as the person responsible for administering the estate, for example where there is no Will, will be able to ask pension scheme administrators to make inheritance tax payments directly.TAX That closes a practical gap in which someone doing the work of administering the estate lacked the standing to trigger payment from the pension, and it should reduce the burden on families dealing with an estate.

Both points sit inside a larger implementation programme. The technical notes set out how notional pension property is identified, valued and allocated to beneficiaries, who reports and pays, how information sharing works, and how the pension reforms interact with existing income tax rules on pension death benefits. HM Revenue and Customs is to publish secondary legislation, guidance and supporting materials ahead of April 2027GOV, and the Institute says it will keep working with HM Revenue and Customs on making the process operate smoothly before the rules take effect.

For estates holding pension assets alongside charitable legacies, the 36% calculation now turns on the standalone pension testTAX, with aggregation available by election where including the pension assets with the rest of the estate produces the better resultTAX. Where formal recognition as administrator is still pending, the person dealing with the estate can ask the scheme administrator to make the inheritance tax payment.TAX

Legal basis is the Finance Act 2026 inheritance-tax-on-pensions provisionsGOV taking effect on 6 April 2027Legislation, with the 36% reduced rate governed by Schedule 1A to the Inheritance Tax Act 1984 for estates leaving at least 10% to charityGOV.