Recently published rules will set SIPP Trustees against Executors and cut survival chances of businesses with property in SIPPS
SIPPs as an IHT Shelter: The Rise, The Reckoning and the Businesses and Executors Nightmare with Opposing Interests
- Fire sale of commercial property from 2027: 54,000+ SIPPs hold illiquid commercial property that cannot be sold in time to meet the deadline. This will destabilise and potentially bankrupt many businesses with commercial rents.
- Trustees of SIPPs duties will conflict with executors
- 40% IHT on the pension pot, plus income tax on withdrawals — effective rates up to 67% for deaths after 75
- Pension bypasses the Will but not the IHT — executors are responsible for a tax on assets they do not control
- Executors must calculate and PAY IHT within six months — widely regarded as unworkable
- Nominations and bypass trusts no longer avoid IHT — discretion is irrelevant from April 2027
- 74% of savers over 40 are unaware of the changes — estates will be structurally unprepared
For the better part of a decade, the Self-Invested Personal Pension (SIPP) occupied a uniquely privileged position in British estate planning. Flexible, generously tax-relieved, and — crucially — sitting outside the taxable estate on death, the SIPP evolved from a retirement savings vehicle into one of the most powerful intergenerational wealth-transfer tools available to affluent families. That era is now drawing to a close. From 6 April 2027, unused pension funds will be brought within the scope of Inheritance Tax (IHT) for the first time in three and a half decades, fundamentally changing the calculus of estate planning and introducing a set of practical challenges for executors that the industry is only beginning to grapple with.
The Making of a Tax Shelter: How SIPPs Became the Preferred Estate Planning Tool
The story begins not with any deliberate act of fiscal generosity, but with the legal structure of pension schemes themselves. Most SIPPs are discretionary trusts: the pension provider, not the member, holds the assets. Because the member has no fixed legal entitlement to the funds — merely a right to nominate who should benefit — the assets fall outside the estate for IHT purposes under Section 151 of the Inheritance Tax Act 1984. This was not designed as a loophole. It was an incidental consequence of how pension law was structured.
For most of the twentieth century, this mattered little in practice. Before April 2011, members of defined contribution schemes were obliged to purchase a lifetime annuity or a scheme pension by the age of 75, meaning that residual pension wealth rarely survived long enough to be passed on. Where death did occur before annuitisation, the discretionary structure meant funds could pass to beneficiaries free of IHT — but the population affected was relatively small.
Two pivotal reforms changed everything. The first was the introduction of drawdown flexibility from April 2011, which allowed members to take income directly from their invested pension pot without converting it to an annuity, preserving a residual fund for inheritance. The second — and the one that truly unleashed the SIPP as an estate planning weapon — was George Osborne’s Pension Freedoms of April 2015. These reforms gave members unrestricted access to their pots from age 55, the freedom to nominate any individual as a beneficiary, and the ability to pass on unused funds to nominated successors who could in turn keep the money within the pension wrapper, potentially free of income tax if the original holder died before 75.
The implications were far-reaching. A SIPP holder could, in theory, draw down on ISAs, bank accounts and investment portfolios to fund retirement — spending the taxable assets first — while leaving the pension untouched, knowing it would pass to children or grandchildren without IHT. If the holder died before 75, beneficiaries could also inherit free of income tax. The pension became, in the words of HMRC’s own 2024 consultation, an instrument allowing “individuals to accumulate unlimited tax-free savings in their pension, draw on other means to fund their retirement, and leave their unused pension assets to be inherited by beneficiaries without any Inheritance Tax charge.”
A further accelerant was added in April 2024 when the Lifetime Allowance — the cap on pension savings that attracted penal tax charges on excess — was abolished entirely, removing the final ceiling on how much could be sheltered within the pension wrapper. The SIPP sector grew accordingly: by 2025, it held over £567 billion in assets under management, serving approximately 5.3 million customers, with Hargreaves Lansdown alone managing £172.7 billion across around 2 million active clients.
The IFS estimated in 2023 that pension wealth is the most unequally distributed form of wealth in the UK, with the top 10% of pension wealth holders owning 55% of total private pension assets. The SIPP had become the estate planning tool of choice for the wealthy — and HMRC had noticed.
The Reckoning: The Autumn Budget 2024 and 2026 HMRC Regulations
Chancellor Rachel Reeves’ Autumn Budget of October 2024 brought the era of the pension as a tax-free legacy vehicle to an end. From 6 April 2027, most unused defined contribution pension funds — including SIPPs, personal pensions and drawdown arrangements — will form part of the deceased’s estate for IHT purposes. The nil-rate band (currently £325,000, frozen until 2030) and the residence nil-rate band (£175,000 where a family home passes to direct descendants) will apply across the entire estate, pension included.
The exemptions are targeted and deliberate. Transfers between spouses and civil partners remain exempt. Death-in-service benefits paid from registered pension schemes are excluded, on the basis that these are financial protection rather than planning tools. Defined benefit pensions in payment are unaffected, as are dependants’ scheme pensions to a spouse or civil partner. What is firmly in scope is the accumulated, undrawn SIPP pot that was being preserved as a legacy.
The scale of the impact has been carefully modelled by HM Treasury. Of approximately 213,000 estates with inheritable pension wealth in 2027–28, around 10,500 are expected to face a new or increased IHT charge. Over the first three years, the measure is projected to generate £3.44 billion in additional IHT receipts. The Office for Budget Responsibility put the annual steady-state figure at approximately £640 million per year by 2029–30. The proportion of estates paying IHT is expected to rise from 5% to around 8%.
The Double Taxation Problem
For those who die after the age of 75 — the majority of deaths — the new rules create an exposure that goes well beyond a straightforward 40% charge. Under the current framework, pension funds inherited by beneficiaries after age 75 are subject to income tax at the beneficiary’s marginal rate when drawn. From April 2027, the sequence runs thus: first, the pension value is added to the estate and the excess above available nil-rate bands is charged at 40% IHT; then, when beneficiaries draw down from the inherited fund, they face income tax at their marginal rate on top.
The combined effect is stark. For a basic-rate taxpayer inheriting a pension where IHT has already eroded 40% of the original value, a further 20% income tax on the remaining 60% leaves them with 48 pence in the pound. A higher-rate taxpayer faces a combined effective rate of 64%; an additional-rate taxpayer, 67%. One commentator has observed that a family receiving a pension pot of £100,000 could find their children — if basic-rate taxpayers — receiving just £48,000, and only £36,000 if they pay the higher rate.
It is important to note that the draft legislation does include a mechanism to prevent full double taxation: income tax will not be levied on the portion of a pension that was paid out as an IHT charge. In practical terms, however, this requires a beneficiary to claim back a tax refund from HMRC — an additional administrative burden in an already complex process, and one that many commentators have described as an unwelcome complication.
The Indirect Cost: Residence Nil-Rate Band Erosion
A further, less-discussed consequence of including pensions within the estate is the interaction with the Residence Nil-Rate Band (RNRB). This additional £175,000 allowance — available where a family home passes to direct descendants — is subject to a tapering rule: it reduces by £1 for every £2 by which the estate exceeds £2 million. Until April 2027, unspent pension funds were excluded from this calculation, allowing many high-net-worth individuals to retain the RNRB regardless of pension size.
From April 2027, the pension pot is counted. An individual with £1.8 million in non-pension assets who holds a £300,000 SIPP — previously under the taper threshold — now has a total estate of £2.1 million, causing the RNRB to begin reducing. If that pension grows to £500,000 before death, the RNRB is lost entirely, adding up to £70,000 in IHT liability that would not previously have existed. For married couples on the second death, this effect can be doubled.
The Executor’s Nightmare: Practical and Procedural Complexity
The policy change is profound in its own right. But it is in the practical administration of estates that many practitioners believe the true difficulties lie — and where executors, personal representatives and their professional advisers will face the greatest challenges from April 2027.
The Six-Month Payment Deadline
IHT is normally due within six months of a person’s death. This deadline exists under current law and is unchanged by the 2027 reforms. Within this window, a complex chain of communication must take place: the pension scheme administrator (PSA) must share details of the member’s unused benefits and nominated beneficiaries with the personal representatives (PRs); the PRs must calculate the IHT due using a new government calculator, apportion the liability attributable to the pension, and notify the PSA; the PSA must then pay the pension’s share of the IHT directly to HMRC through the scheme’s accounting-for-tax process.
HMRC acknowledges in its own technical consultation that this process “will require information to be shared between PSAs, PRs and HMRC in a timely manner” and that “there will be certain scenarios which do not fit neatly into the process.” That is something of an understatement. Interactive Investor, in its written evidence to the House of Lords Economic Affairs Committee, argued that the six-month deadline was “impractical in respect of pension funds” and proposed extending it to twelve months — a view shared widely across the industry. The Committee’s January 2026 report echoed these concerns, warning that the six-month deadline risked “delays and additional costs” from valuation difficulties and liquidity problems.
The Illiquid Asset Problem
The most acute practical difficulty arises where SIPP assets are illiquid. According to FCA data, 54,387 SIPP plans currently hold commercial property. These holdings — often business premises used in the pension holder’s own enterprise, held under sale-and-leaseback arrangements — cannot be sold in weeks. Commercial property transactions typically take months: surveys, conveyancing, searches, and the vagaries of the market all intervene. Yet the clock on the six-month IHT deadline begins ticking from the date of death.
Bowmore Financial Planning has warned that this combination of illiquid assets and a tight payment deadline could trigger a genuine liquidity crisis for some estates. As one of its chartered financial planners observed: “These assets were never designed to be accessed quickly, and with the changes to IHT rules families could suddenly find themselves trying to raise a six-figure tax bill without the liquidity to do so. The combination of SIPP ownership structures, slow-moving commercial property markets and the new inheritance tax rules has the potential to create a perfect storm.”
The legal structure of SIPPs further complicates matters. The legal owner of SIPP assets is the SIPP provider, not the pension holder. Any sale of commercial property by the SIPP trustees must be an arm’s-length transaction at full open market value; failing to comply risks triggering an unauthorised payment charge of 55% of the transferred value. This adds procedural delay to an already compressed timeline.
Where the six-month deadline is missed, payment plans can be agreed with HMRC, but interest will accrue on unpaid tax — an additional cost burden on beneficiaries who may already be navigating an estate in financial difficulty.
Multiple Parties, Multiple Complications
The proposed process involves at minimum four sets of actors: the deceased’s PRs (usually the executors), the PSA, the nominated beneficiaries, and HMRC. Where an estate includes multiple pension schemes — not unusual for those who have built up pensions across a working lifetime — the process must be replicated for each. Where a SSAS (Small Self-Administered Scheme) is involved, with multiple members holding fractional interests in shared assets such as a commercial property, the coordination challenge is compounded: the IHT on one member’s death may require the liquidation of an asset in which other living members have a stake.
The Withholding Mechanism
The draft legislation does provide one tool to manage the tension between distributing benefits and settling tax. Personal representatives can instruct a pension scheme to withhold up to 50% of taxable benefits for up to 15 months after the end of the month of death. This “withholding notice” mechanism is designed to prevent assets being distributed before the IHT position is settled. In theory, it protects the estate; in practice, it can leave beneficiaries waiting well over a year before they can access their inheritance, and requires careful co-ordination between the PR and the PSA to execute correctly.
Awareness Deficit
An additional risk lies in the startling lack of public awareness. Industry research cited by Interactive Investor suggests that nearly three-quarters (74%) of pension savers over 40 either do not know about the April 2027 changes or have not factored them into their estate planning. Executors appointed under wills drawn up without knowledge of the new rules may find themselves facing IHT liabilities for which the estate is entirely unprepared — no liquidity ring-fenced, no life insurance in place, no updated expression of wishes.
The End of the Nomination as an IHT Shield — and What Remains
The Old Regime: Why the Expression of Wishes Worked
Under the law as it has stood for decades, the expression of wishes (or nomination form) was both the engine of SIPP estate planning and, paradoxically, the reason it worked. The critical legal point was this: the nomination had to remain non-binding. A discretionary payment — where the pension provider retained genuine freedom to decide who received the death benefits — fell outside the member’s estate for IHT purposes. An expression of wishes guided the trustees but did not bind them, which is precisely what preserved the IHT exemption.
By contrast, a binding nomination — one that legally compelled the provider to pay a specific individual — converted the pension from a discretionary arrangement into something more akin to a testamentary direction, pulling the death benefits into the taxable estate. This is why older pension products such as Section 32 buy-out policies and Section 226 Retirement Annuity Contracts, which sometimes required binding nominations, could in certain circumstances attract IHT even under the old rules. The lesson was clear: retain discretion, and the pension stays outside the estate; lose discretion, and HMRC may look at it differently.
The practical result was that most SIPP holders completed a standard expression of wishes form — naming children, grandchildren, or other beneficiaries as they saw fit — and rested assured that the discretionary structure would do the tax work. In almost all cases, pension providers followed the nomination. The framework was, as one commentator described it, “practically binding but legally discretionary.” This nuanced position was the cornerstone of decades of estate planning advice.
The 2027 Change: Discretion No Longer Determines IHT Treatment
From 6 April 2027, this changes completely and irrevocably. The Finance Act 2026, which received Royal Assent on 18 March 2026, amends the Inheritance Tax Act 1984 to bring unused pension funds and death benefits within the estate “regardless of whether the pension scheme administrators or scheme trustees have discretion over the payment of any death benefits.” The government’s own technical note is unambiguous: “The existence of trustee discretion will no longer determine whether pension assets fall within the scope of Inheritance Tax.”
In other words, the legal mechanism that made the expression of wishes a tax-planning instrument is being dismantled. Whether a nomination is discretionary or binding, whether funds are paid to individuals named in an expression of wishes or distributed at the trustees’ own initiative, the pension value will be included in the estate for IHT calculation. The value of the pot at death is what HMRC will tax — not how it is subsequently distributed.
It is important to be precise about what this means and what it does not mean. The expression of wishes form does not become irrelevant; it remains the primary mechanism by which members communicate to their pension provider who they wish to benefit. Trustees will continue to exercise discretion in the usual way, and they will continue — in the vast majority of cases — to follow the member’s nomination. What changes is the IHT consequence of the fund existing at all. As Thomson Snell & Passmore have noted in their adviser guidance: “Those nominations remain very important for discretionary schemes. It is only the IHT position on the funds remaining at death that has changed, as the funds are now within the scope of UK IHT.”
The practical implication is profound. The pre-2027 advice to keep the nomination non-binding in order to preserve the IHT exemption is, after April 2027, unnecessary as a tax strategy — because the IHT exemption disappears in any event. Nominations should now be evaluated primarily through the lens of income tax efficiency (directing funds to lower-rate taxpayers) and estate administration practicality, not IHT avoidance.
Benefits Still Directed Outside the Estate: Timing, Probate and Administration
Notwithstanding the IHT change, one important feature of the pension nomination structure survives: SIPP death benefits continue to fall outside the probate estate and are not distributed under the terms of the will. The SIPP provider’s trustees retain discretion over who receives the benefits, guided by the expression of wishes, and the pension does not pass through the Probate Registry. This can offer a significant practical advantage for beneficiaries — pension funds can, in principle, be released to nominated individuals more quickly than assets that must await the grant of probate, which can take three to twelve months or longer.
This probate-bypass feature is, however, substantially complicated by the IHT payment mechanics from April 2027. The pension may sit outside the probate estate, but IHT must still be calculated and reported by the personal representatives (the executors) before, or in parallel with, any distribution. The HMRC technical note makes clear that from April 2027, pension scheme administrators will need to share information with personal representatives — and respond to enquiries — before the grant of probate has been issued. This is a departure from current practice, where providers typically require sight of the grant before releasing information. Executors will need to provide identity evidence, a copy of the will, and a death certificate to begin the process, even in the pre-grant phase.
The result is a hybrid situation: the pension benefits may ultimately bypass probate in terms of distribution, but the executor is nonetheless central to the tax process. The personal representative must: identify all pension schemes; obtain values from each pension scheme administrator (who now have a statutory duty to respond within four weeks of notification of death); calculate the IHT attributable to each pension; notify each administrator; and either direct the administrator to pay the IHT from the pension fund or reimburse the estate for any IHT already settled from estate assets.
This has a significant implication for estates where the pension beneficiaries and the estate beneficiaries are different people — which is entirely common. A member may nominate adult children to receive the pension while leaving the rest of the estate to a spouse. In such cases, the executor — acting on behalf of the estate — bears the primary responsibility for calculating and discharging the IHT on the pension, but the tax burden ultimately falls on (or should be recovered from) the pension beneficiaries. The draft legislation provides that where the IHT on the pension has been paid from the free estate, the personal representative can reclaim a proportionate share from the pension beneficiaries. This right of recovery is a new and untested legal mechanism, and it has the potential to create conflict between beneficiaries of the estate and beneficiaries of the pension where they are not the same individuals.
Bypass Trusts: The Planning Tool That Has Lost Its Appeal
Before April 2027, nominating a discretionary bypass trust as the beneficiary of a SIPP death benefit was a sophisticated estate planning technique. The pension would be paid to the trust on death; the trust would then have the flexibility to make appointments to family members over time, allowing beneficiaries to control the timing of payments and manage income tax exposure, while keeping the value outside both the deceased’s estate and — crucially — outside the estates of the beneficiaries themselves.
From April 2027, the tax position of bypass trusts is fundamentally altered. As Techzone’s detailed technical guidance confirms: “From April 2027, the payment of a lump sum to a bypass trust will be included in the deceased’s estate for IHT purposes.” The receipt of the pension by the trust no longer provides an IHT shelter. The 40% charge is levied on the pension value as part of the estate calculation regardless of where the death benefits are ultimately directed. The trust may still provide other benefits — flexibility of distribution, protection from creditors or family breakdown, control over the timing of income tax — but it no longer serves its original purpose as an IHT-efficient channel for pension wealth.
This is a significant planning casualty. Many existing trust arrangements were established expressly for the purpose of IHT efficiency, and their rationale requires revisiting. Trustees of such arrangements face new questions about whether the ongoing cost and administrative burden of a bypass trust remains proportionate to the benefits it now delivers.
What Nominations Should Now Consider
With the IHT treatment of death benefits now determined by the existence of the pot rather than its destination, the strategic purpose of nomination forms has shifted. Several considerations warrant attention:
The spousal exemption remains powerful. Pension death benefits passing to a surviving spouse or civil partner are exempt from IHT, just as other spousal transfers are. Where a surviving spouse is alive, nominating them as primary beneficiary preserves this exemption on the first death, deferring any IHT liability — and allowing the surviving spouse more time to plan, draw down, or restructure the pension assets — to the second death. Channelling pension funds to children on the first death, rather than the surviving spouse, wastes this exemption and accelerates the tax charge by potentially decades.
Income tax position of beneficiaries matters more. Since the IHT cannot now be avoided through the nomination, the focus shifts to managing income tax on inherited drawdown funds. Where the deceased dies after 75, beneficiaries will pay income tax at their marginal rate on withdrawals from the inherited pension. Nominating multiple beneficiaries — particularly those who pay income tax at lower rates — can spread and reduce the income tax burden. A nominated beneficiary who is a non-taxpayer or basic-rate payer will retain significantly more of their inheritance than a higher-rate taxpayer.
Consider pension beneficiaries versus estate beneficiaries carefully. Where the individuals who inherit the pension are different from those who inherit the rest of the estate, the potential for disputes over the IHT recovery mechanism is real. The executor can recover IHT attributable to the pension from the pension beneficiaries — but only if the legal machinery works smoothly and the parties co-operate. Aligning pension and estate beneficiaries, or at least considering the implications carefully, will reduce conflict.
The two-year designation rule still applies. For deaths before age 75, death benefits must be designated to a beneficiary within two years of death in order for the income tax exemption to apply. Missing this deadline does not affect IHT (which is charged regardless) but does affect the income tax position — a potentially expensive mistake where a pension pot is large.
What Potential Executors and Advisers Should Do Now
The complexity of the new regime means that preparation before death — not crisis management after it — is the only effective response. Several strategies warrant consideration:
Revisit Drawdown Strategy: The orthodox pre-2027 advice to preserve the pension and spend taxable assets first is now, in many cases, the wrong strategy. Drawing down from the SIPP at lower rates — spreading crystallisation across multiple tax years to manage income tax — and gifting the net proceeds under the “normal expenditure out of income” exemption can reduce the pension pot without triggering the IHT that will apply post-mortem.
Review Illiquid Holdings: SIPP holders with commercial property should urgently assess whether those holdings remain appropriate. Selling property out of the SIPP before death transfers cash into the pension (and the IHT liability to the estate, as before), but eliminates the liquidity crisis for executors and reduces the risk of a forced sale at an unfavourable price. Any sale must be at full market value to avoid an unauthorised payment charge.
Whole-of-Life Insurance: For those whose estate plans cannot easily be restructured, a whole-of-life policy written in trust to pay beneficiaries directly can provide the liquidity needed to settle an IHT bill without requiring the liquidation of SIPP assets. Premiums paid regularly from surplus income may qualify for the normal expenditure exemption from IHT.
Update Expressions of Wishes: Given the spousal exemption, reviewing beneficiary nominations to channel pension funds first to a surviving spouse — deferring the IHT liability to the second death and allowing more time for planning — may be appropriate in many cases.
Executor Preparation: Executors should, as a matter of course, now request pension scheme contact details and copies of current expression of wishes forms as part of estate administration from day one. They should budget explicitly for the cash-flow impact of a 40% charge on pension assets and confirm with each PSA whether the scheme will accept a withholding notice and handle IHT payment direct to HMRC.
Conclusion
Conclusion
The SIPP’s three-decade run as a near-perfect IHT shelter was always, in retrospect, a product of timing as much as design. The combination of pension freedoms, the abolition of the Lifetime Allowance, and nil-rate bands frozen since 2009 created a window of extraordinary tax efficiency that the wealthiest families exploited with considerable sophistication. The Autumn 2024 Budget has closed that window.
What replaces it is not simply a higher tax bill — it is a new layer of administrative complexity that risks catching executors, beneficiaries, and even professional advisers unprepared. The interaction between the six-month IHT deadline, the illiquid nature of many SIPP portfolios, and the multi-party communication chain required by HMRC’s proposed process is a combination that even experienced practitioners regard with concern. For estates holding commercial property in a SIPP, it is a potential crisis in the making.
The lesson for advisers and estate planners is plain: the time to restructure is now, not after the death that will make restructuring impossible. For those who leave it too late, the executor — that least glamorous of legal offices — will bear the burden of a system that was designed for a tax world that no longer exists.
This article is for general information purposes only and does not constitute legal or financial advice. Tax rules are subject to change. Professional advice should be sought in all individual cases.