Pensions & IHT - the impact on nil rate band planning
13 July 2026
How IHT will be calculated once pensions form part of the estate from April 2027 has moved on since the original announcement in the 2024 Autumn Budget. Initially it was suggested that the nil rate band would be apportioned between the pension assets and the rest of the estate. However, following consultation, the final rules published in the Finance Act 2026 reveal that it is the IHT bill which is to be apportioned and not the nil rate band. While both routes give the same end tax result, there are knock on implications for clients who were planning to use their nil rate band in a particular way.
Who calculates the tax?
The Finance Act 2026 confirms the responsibility for calculating IHT and reporting it to HMRC falls squarely on the personal representatives (PRs). Consequently, the nil rate band is not apportioned. Instead, the notional pension property is aggregated with the other assets within the estate and the available nil rate band applied to the combined amount to determine the amount of IHT due. It is then the IHT bill which is apportioned.
There are of course options for how the pension’s share of the IHT bill is paid. This can come from the free estate or, alternatively, the PRs can ask the Pension Scheme Administrator (PSA) to pay directly to HMRC or request that the pension beneficiaries settle their own bill.
How will this work in practice?
On request, the PSA must provide the PRs with the value of unused funds and other death benefits along with details who will benefit on exercise of their discretion. The key information, as far as the PRs are concerned, is the split between exempt and non-exempt beneficiaries. An exempt beneficiary includes a spouse or civil partner. This will allow the PRs to calculate the IHT liability and complete their IHT reporting.
If all the pension is left to a spouse or civil partner, the spouse exemption will apply and therefore there is no IHT due on the pension. However, if a scheme member has nominated a non-exempt beneficiary, such as children, for any part of the unused pension or death benefit, this could be subject to IHT.
Example
James dies leaving the following in his will and pension scheme nominations:
After deducting the spouse exemption, the taxable estate is £800,000 (£500,000 + £300,000). The tax on this is (£800,000 - £325,000) x 40% = £190,000.
This is split between his free estate and pension:
Free estate: (£500,000/£800,000) x £190,000 = £118,750
SIPP: (£300,000/£800,000) x £190,000 = £71,250
James dies leaving the following in his will and pension scheme nominations:
| Asset | Value | Beneficiary |
| Family home (50% share) | £500,000 | Spouse |
| Other savings and ISAs | £500,000 | Children |
| SIPP | £1,000,000 | £700,000 to spouse and £300,000 to grandchildren |
After deducting the spouse exemption, the taxable estate is £800,000 (£500,000 + £300,000). The tax on this is (£800,000 - £325,000) x 40% = £190,000.
This is split between his free estate and pension:
Free estate: (£500,000/£800,000) x £190,000 = £118,750
SIPP: (£300,000/£800,000) x £190,000 = £71,250
An overlooked aspect of combining the notional pension property with the free estate to determine the IHT due is that the pension assets can benefit from the residence nil rate band (RNRB). The RNRB is set against the total estate, not specifically against the family home.
Example (continued)
Had James instead passed his share in the family home to his children and given his wife the savings and ISAs, his estate would benefit from RNRB. This would reduce the overall tax bill which is ultimately apportioned, meaning that the pension scheme assets suffer less tax.
The taxable estate is still £800,000 (£500,000 + £300,000) but the available nil rate band now includes an additional £175,000 of RNRB.
The tax on the estate is now (£800,000 - £325,000 - £175,000) x 40% = £120,000
This then apportioned between the free estate and pension.
Free estate: (£500,000/£800,000) x £120,000 = £75,000
SIPP: (£300,000/£800,000) x £120,000 = £45,000
In this example, the children have received a share in the family home but they haven’t had the full benefit of the RNRB. However, the grandchildren as beneficiaries of the SIPP have a lower tax bill despite not inheriting the property.
Of course, in the earlier example where James passed his share of the house to his spouse, the RNRB would transferable and may be claimed on second death.
Had James instead passed his share in the family home to his children and given his wife the savings and ISAs, his estate would benefit from RNRB. This would reduce the overall tax bill which is ultimately apportioned, meaning that the pension scheme assets suffer less tax.
The taxable estate is still £800,000 (£500,000 + £300,000) but the available nil rate band now includes an additional £175,000 of RNRB.
The tax on the estate is now (£800,000 - £325,000 - £175,000) x 40% = £120,000
This then apportioned between the free estate and pension.
Free estate: (£500,000/£800,000) x £120,000 = £75,000
SIPP: (£300,000/£800,000) x £120,000 = £45,000
In this example, the children have received a share in the family home but they haven’t had the full benefit of the RNRB. However, the grandchildren as beneficiaries of the SIPP have a lower tax bill despite not inheriting the property.
Of course, in the earlier example where James passed his share of the house to his spouse, the RNRB would transferable and may be claimed on second death.
The impact of the PSA's discretion
The PSA has a fiduciary duty to ensure that it has identified all the possible beneficiaries and fairly considered their interests and the wishes of the deceased scheme member before determining who will benefit. They may be guided by a death benefit nomination but are not bound by it.
The IHT on the estate cannot be calculated until the PSA has determined who is to benefit. The PRs of the estate will need to know how much of the death benefit is to be paid to exempt beneficiaries (spouse/civil partner/charities etc.) before they are able to calculate the estate’s liability and report it to HMRC.
This limits the opportunity for the scheme member to complete a nomination asking the PSA to consider paying an amount to non-exempt beneficiaries (such as children or grandchildren) which would be free of IHT, with the balance paid to their spouse/civil partner. The PSA will have made their decision before the IHT split is known, and often without the knowledge of how the free estate will be distributed.
There is one situation where this type of planning would be possible. This would involve leaving their entire free estate to their surviving spouse. In this scenario, the free estate would pass IHT free under the spouse exemption and the nil rate band would not be used. This would allow the PSA to allocate unused pension to children or grandchildren up to the nil rate band. This would not include any RNRB as the family home would pass to the spouse rather than a direct descendant.
Impact on NRB planning in the will
There is a similar impact on nil rate band planning someone may have undertaken in their will. Leaving an amount up to the available nil rate band into a discretionary will trust for family members has been commonplace - especially prior to the introduction of the transferable nil rate band.
Once again, if there are non-exempt beneficiaries inheriting via the pension which results in IHT becoming due, there will be no nil rate band available and therefore nothing going into the will trust. Clients with this type of arrangement within their existing will may wish to consult their solicitor to ensure that it continues to reflect their intentions.
Summary
The way in which IHT is calculated will make nil rate band planning problematic after pension assets are included within the estate. As the nil rate band will not be apportioned, trying to pass specific amounts to trusts or non-exempt beneficiaries may not always have the desired effect.
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