Under the rules in force until 5 April 2027, a SIPP is generally not subject to Inheritance Tax. The funds sit inside a discretionary trust run by your pension provider, so legally they are not yours to leave, and they fall outside your estate when IHT is calculated. That protection has conditions, and it can be lost. It is also on its way out: from 6 April 2027, most unused pension funds and death benefits will be brought within IHT, which changes the answer for anyone planning around a SIPP now.
Why a SIPP Currently Sits Outside Your Estate
The exemption is a product of how the money is held. Your SIPP provider holds the funds under a discretionary trust. You do not own them the way you own a bank balance or a house, and on your death the scheme administrator decides who receives the benefits. Because the assets were never yours to give, they do not form part of your estate for IHT.
The statutory basis is Section 151 of the Inheritance Tax Act 1984, which leaves an interest in a registered pension scheme out of account when valuing the estate where that interest ends on death.1Legislation.gov.uk. Inheritance Tax Act 1984 – Section 151 HMRC’s manual confirms the same treatment for rights to a pension or annuity, with death benefits themselves relying on the discretionary payment structure rather than that specific exclusion.2HM Revenue & Customs. Inheritance Tax Manual – IHTM17036 Where the administrator retains genuine discretion, the full value of the SIPP passes to your beneficiaries without the 40% charge that applies above the £325,000 nil-rate band.3GOV.UK. Inheritance Tax Nil-Rate Band Thresholds From 6 April 2026
The Expression of Wish
You tell the provider who you would like to receive the funds by completing an Expression of Wish, sometimes called a nomination form. The wording matters. It is a wish, not an instruction. That is what keeps the arrangement discretionary and preserves the exemption. GOV.UK puts it directly: you do not usually pay Inheritance Tax on a pension lump sum because payment is usually discretionary, and if the payment was not discretionary, IHT may apply.4GOV.UK. Tax on a Private Pension You Inherit Trying to make a nomination legally binding on the administrator can convert the SIPP into something that looks like part of your estate and bring in the 40% charge.5GOV.UK. Inheritance Tax: Thresholds, Rules and Allowances
Update the form after marriage, divorce, the birth of a child, or the death of a named beneficiary. An outdated nomination will not by itself trigger IHT, but it can send funds to the wrong people.
What Can Pull a SIPP Back Into IHT
The exemption has weak points. HMRC watches for them.
Deliberately Not Drawing Benefits
If you are terminally ill and consciously choose not to take pension benefits you are entitled to, HMRC can treat that omission as a transfer of value under section 3(3) of the Inheritance Tax Act 1984. Section 12 of the same Act provides important cover. For members aged 75 or over, omissions to exercise pension rights are excluded from being transfers of value. For members under 75, the omission is generally protected unless the member made a separate pension disposition within two years of death and knew, or had reason to believe, they might die in that period.6Legislation.gov.uk. Inheritance Tax Act 1984 – Section 12
Large Contributions or Transfers While in Poor Health
Substantial contributions made while seriously ill or shortly before death can be challenged as gifts with reservation or under the associated operations rules, bringing the contributed amount back into the taxable estate. Transfers between pension schemes while in ill health face the same scrutiny. HMRC assumes normal health for transfers made more than two years before death unless evidence points the other way; transfers within that two-year window are examined much more closely, and any uplift in death benefits in the receiving scheme can be treated as a transfer of value.7HM Revenue & Customs. Inheritance Tax Manual – IHTM17070
Withdrawing the Money
Once cash leaves the SIPP and lands in your bank account, the pension exemption is gone. Those funds are part of your general estate. Gift a large withdrawn sum and it becomes a potentially exempt transfer, with the full 40% rate applying if you die within three years and taper relief reducing the rate on a sliding scale between three and seven years, reaching zero after seven full years. Taper only matters where the seven-year total of gifts exceeds £325,000.8GOV.UK. How Inheritance Tax Works – Rules on Giving Gifts
What Changes on 6 April 2027
The government confirmed at the Autumn Budget 2024 that most unused pension funds and death benefits will be included in the value of a person’s estate for IHT.9GOV.UK. Inheritance Tax: Unused Pension Funds and Death Benefits The discretionary versus non-discretionary distinction disappears. The stated rationale is that pension schemes have been “increasingly used and marketed as a tax planning tool to transfer wealth without an Inheritance Tax charge, rather than for their intended purpose of funding retirement.”10GOV.UK. Technical Consultation – Inheritance Tax on Pensions
In practice, your SIPP balance will be added to the rest of your estate when IHT is calculated. Someone with a £500,000 SIPP and a £400,000 home could face a substantial IHT bill that would not exist under the current rules.
A limited set of pension benefits stays outside IHT after the change:
- Lump sums payable from a registered pension scheme on death in service.
- Pension funds under £1,000.
- Annuities already in payment to dependants.
- Funds that can only provide a dependant’s scheme pension.9GOV.UK. Inheritance Tax: Unused Pension Funds and Death Benefits
The scheme administrator, not the executors, will report unused pension funds and death benefits to HMRC and pay the IHT due. Personal representatives can direct the administrator to hold back up to 50% of the taxable benefits for up to 15 months from the date of death to cover the bill, and from 12 months after death beneficiaries become jointly liable with the administrator for any tax still outstanding.10GOV.UK. Technical Consultation – Inheritance Tax on Pensions
Income Tax Your Beneficiary May Still Owe
Even where a SIPP escapes IHT under the current rules, the beneficiary can still face income tax on what they receive. The dividing line is your age at death.
Die before age 75 and most lump sums and payments from a new drawdown fund are free of income tax, provided the lump sum does not exceed the member’s lump sum and death benefit allowance. There is a deadline: if the provider pays the lump sum more than two years after being told of the death, income tax applies regardless of age.4GOV.UK. Tax on a Private Pension You Inherit
Die at 75 or over and the provider deducts income tax from any lump sum or drawdown payment. The amount is added to the beneficiary’s income for the year and taxed at their marginal rate. A beneficiary drawdown account keeps the funds inside the pension wrapper and lets the beneficiary pace withdrawals to manage the tax hit year by year.4GOV.UK. Tax on a Private Pension You Inherit
From April 2027, income tax on inherited pension funds will continue to apply on top of any IHT charged on the estate. The government has said it will address the interaction between the two, but the mechanics are not yet finalised. If your estate planning currently leans on the SIPP as a way to pass wealth tax-efficiently, the window before April 2027 is the time to test that plan with a financial adviser.