IHT, pensions and trusts: Budget 2026 technical changes

There is no headline inheritance tax change in Budget 2026, but there is a cluster of technical measures for practitioners who deal with estates, trusts and pensions. Most important is the run-up to unused pension funds coming into inheritance tax from 6 April 2027, where Budget 2026 adds practical changes for personal representatives. Several other measures took effect on Budget day.

Thresholds and rates

Annex A confirms the inheritance tax position for 2026-27 and 2027-28:

Pension allowances are also unchanged for 2027-28: the lump sum allowance is £268,275, the lump sum and death benefit allowance £1,073,100, the annual allowance £60,000 and the money purchase annual allowance £10,000.

Pensions coming into IHT from April 2027

Finance Act 2026 brings most unused pension funds and death benefits into a person’s estate for inheritance tax from 6 April 2027. Budget 2026 adds two technical changes, both from 6 April 2027:

• a prospective personal representative will be able to direct pension scheme administrators to pay the inheritance tax due to HMRC, when certain conditions are met
• those administering an estate will be able to choose whether notional pension property is included in the general component of the estate or treated as a separate component when working out the 36% reduced rate for estates leaving at least 10% to charity

There is no new impact note for these changes. HMRC says they do not affect the impacts in the 2025 note on unused pension funds and death benefits.

Pension death benefits

Two-year rule removed. At present, tax-free pension and lump sum death benefits can become taxable simply because they are paid more than two years after the scheme administrator first knew, or could reasonably have known, about the member’s death. That rule is removed for payments made on or after 28 October 2026, whether the payment would have been taxed as the recipient’s pension income or under the special lump sum death benefits charge.

Excess lump sum death benefits. Where a member who died before 75 had lump sum death benefits above their available lump sum and death benefit allowance, the excess will no longer be treated as pension income of the beneficiaries. Instead each beneficiary will be charged on their share of the excess at their marginal rate for the year it was paid, through a standalone assessment process. This applies to payments made on or after 6 April 2024, with transitional rules for 2023-24, and related inheritance tax changes apply to deaths on or after 6 April 2027.

Terminal illness. A serious ill-health lump sum will be payable where the member can reasonably be expected to live for less than a year, and a medical practitioner based outside the UK can provide the evidence where the member lives in the same country. This takes effect from Royal Assent.

Defined benefit surpluses. From 6 April 2027 defined benefit schemes will be able to pay surplus assets directly to members, where scheme rules allow, taxed as pension income if conditions are met.

Trusts

Liabilities in trust arrangements. New rules will set a statutory basis for taking account of liabilities properly incurred by trustees when valuing settled property, align their treatment with personal liabilities, and extend the existing debt deduction restrictions and anti-avoidance rules so that liabilities funded with value from a beneficiary’s own estate cannot reduce inheritance tax. This applies to deaths and other chargeable events on or after 28 October 2026.

Temporarily migrating trusts. The capital gains tax exit charge will not apply where a trust becomes UK resident because a trustee moves to the UK and stops being UK resident later that year or the next, from 28 October 2026.

Capital gains tax on gifts

As announced at Budget 2025, the formula that restricts gift holdover relief on gifts of shares will be updated from 6 April 2027 so that assets in the intangible fixed assets regime, or that qualify for the substantial shareholding exemption, are taken into account. See our guide to gift holdover relief.

Other measures

• NS&I tracing error. Estates affected by the National Savings and Investments tracing error on bereavement claims will get an inheritance tax exemption for the affected holdings and an income tax easement for personal representatives, delivered by regulations.
• High value council tax surcharge. A new surcharge on homes in England worth £2 million or more starts from April 2028. See Budget 2026 for landlords.

What it means for practitioners

Prepare for April 2027 pension estates. Make sure personal representatives know they will be able to direct schemes to pay inheritance tax, and agree processes with pension providers for valuing and reporting pension property.

Revisit delayed death benefit cases. Beneficiaries who would have faced tax only because of the two-year rule will benefit for payments from 28 October 2026. Check whether any pending payments fall either side of that date.

Review trust loan and debt structures. Trusts that rely on liabilities to reduce the value of settled property should be reviewed against the new rules, which already apply to chargeable events from Budget day.

Our guides to inheritance tax planning, IHT and trusts and the nil-rate band cover the existing rules. The Pension Tax Allowance for low-income pensioners is covered separately.

Frequently asked questions

Are inheritance tax thresholds changing in Budget 2026?

No. The nil-rate band stays at £325,000, the residence nil-rate band at £175,000 and the 100% agricultural and business property relief allowance at £2.5 million in 2027-28.

When do pensions become subject to inheritance tax?

Most unused pension funds and death benefits come within the value of an estate from 6 April 2027, under Finance Act 2026. Budget 2026 lets personal representatives direct pension schemes to pay the tax when certain conditions are met.

What is the pension two-year rule and why does it matter?

It made tax-free pension death benefits taxable if paid more than two years after the scheme administrator knew, or should have known, of the death. It is removed for payments made on or after 28 October 2026.

What changes for trusts with debts?

For deaths and chargeable events on or after 28 October 2026, new rules govern when liabilities incurred by trustees can reduce the value of trust property, with anti-avoidance rules for liabilities funded by value from a beneficiary’s own estate.