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Discretionary pension trusts and IHT planning are set for a major overhaul from 6 April 2027. Individuals using discretionary pension arrangements to pass on wealth tax-free should take action now to understand how these changes will impact their estate planning and inheritance tax liabilities.
Major Shift in IHT Treatment for Discretionary Pension Trusts
For years, discretionary pension trusts offered an effective way to pass on unused pension funds without triggering inheritance tax (IHT). These structures allowed trustees to use their discretion to allocate remaining pension funds after death, keeping the assets outside the deceased’s estate and thus free from IHT.
However, the UK government has confirmed that from 6 April 2027, this inheritance tax exemption will be removed. In the future, most unused pension funds will be treated as part of the deceased’s estate, making them liable for Inheritance Tax (IHT) at rates of up to 40%.
What’s Changing from April 2027? Under the new rules announced in the Autumn Statement 2024, unused pension funds within discretionary trusts will be:
- Included in the deceased’s estate for IHT purposes
- Subject to the standard 40% IHT charge, where applicable
- Reported by pension scheme administrators to HMRC
- Paid directly from the pension scheme within six months of death
This change will affect defined contribution and defined benefit schemes, as well as qualifying non-UK pensions. It applies regardless of whether the scheme is UK-registered or overseas as long as the deceased was domiciled in the UK.
What Will Remain Exempt?
While the majority of discretionary pensions will now fall under IHT, some exceptions remain. The most notable are:
- Dependants’ scheme pensions – where the funds can only be used to provide an ongoing pension for a dependent, the exemption still applies.
- Some annuities and fixed benefits within non-discretionary structures also remain outside the estate.
These exceptions are narrowly defined, and it’s crucial to review your pension structure to understand if you’re affected.
Why This Matters to Business Owners and Wealth Planners
This change affects how wealth is passed on and could create significant tax liabilities for families who previously assumed pension pots were exempt from taxation. The government estimates that over 10,000 estates will be newly exposed to IHT, with an additional 38,000 seeing increased liabilities.
High-net-worth individuals, entrepreneurs, and directors with sizable pensions should now:
- Review how their pension funds are structured
- Understand the new reporting and payment responsibilities
- Reevaluate estate planning strategies
New Responsibilities for Pension Providers and Trustees
From April 2027, pension scheme administrators (PSAs) will be responsible for:
- Calculating the IHT due on unused pension funds
- Reporting the value of pension funds to HMRC
- Paying the IHT directly from the pension within six months of the month of death
This introduces new compliance obligations and may require system changes for scheme providers and trustees.
If the IHT is not paid on time, interest charges will apply—further adding to estate costs.
How This Affects Beneficiaries
For individuals inheriting pensions from someone aged 75 or older, this change could result in both income tax and IHT on the same fund. That’s because pension withdrawals are taxed as income for beneficiaries once the deceased is over 75, and now the capital itself may also be taxed under IHT.
This double exposure significantly reduces the value of inherited pension assets, especially for higher-rate taxpayers.
Planning Considerations Ahead of the Change
There is still time to plan. With the change coming into force in April 2027, you should consider:
- Withdrawing excess pension funds while income tax rates remain favourable
- Gifting post-withdrawal funds during a lifetime to reduce the size of the estate
- Reviewing use of trusts, family investment companies, or inheritance tax reliefs
- Ensuring Wills and death benefit nominations are updated
- Working with your pension provider to understand their reporting plans
What You Should Do Now
If your estate planning strategy includes discretionary pension trusts, it’s vital to act well ahead of the 2027 rule change. Start by:
- Reviewing the structure of all your pensions
- Understanding how much of your unused pension could be taxable
- Considering whether to consolidate or restructure your pension arrangement s
- Engaging with an IHT specialist or accountant to develop a tax-efficient plan
Our Tax Advisors assist clients with inheritance tax (IHT) and pension planning, offering proactive strategies to reduce IHT liabilities as laws change.
With significant shifts in discretionary pension trusts and IHT coming in April 2027—where unused pension funds will no longer be excluded from estates—failing to act now could result in unexpected tax charges for your family.
It’s important to review and update your plans early to effectively reduce your taxes. Need help with the pension tax changes coming in 2027? Contact our tax experts today to protect your estate and lower your inheritance tax risk.