The recent Budget on 28 October 2026 was, to the relief of many in the profession, a much quieter affair than its predecessors under this government. After the seismic changes to Inheritance Tax (IHT) enacted by the 2024 Budget, this year’s had comparatively little to say about IHT.
However, buried within the Budget document were two changes which, while looking comparatively technical on the surface, may well affect more estates than it would appear at first glance. While both changes represent partial U-turns from the government, both are relatively sensible and, hopefully, uncontroversial.
How Inheritance Tax on pensions is changing
As a reminder, from 6 April 2027, IHT will apply to most unused pension savings. This change, introduced by the 2024 Budget, will, at a stroke, bring many more estates into the IHT regime and has negatively affected the retirement plans of millions.
That change is largely untouched by the 2026 Budget, but the government has introduced two amendments which may affect Personal Representatives (PRs) post-April 2027.
Further general information is available in the government’s guidance on tax on pension death benefits.
Paying Inheritance Tax from pension funds
The first amendment will enable PRs to instruct pension administrators to pay the IHT due to HMRC directly, provided certain conditions are met.
It was pointed out by many within the industry that PRs could well find themselves in a situation in which IHT is due before the Grant of Probate could be issued, while being unable to access pension pots to pay that liability. This change is therefore welcome and should make the lives of PRs slightly easier.
The 36% charitable rate of Inheritance Tax
The second amendment relates to the reduced 36% rate of IHT available to estates in which at least 10% of it is passing to charitable beneficiaries.
Under the rules as previously drafted, the pension, while not being an asset that would pass under the terms of a Will, was to be included as part of the “general component” of the estate. This meant that many people who had drafted their Wills to include a legacy of the amount required to qualify their estates for the reduced rate would find that those clauses no longer achieved what they wanted them to.
This was because paying 10% of the estate passing under the Will would not be the same as paying 10% of the “general component”, and so the estate would no longer qualify for the reduced rate. The government provides further information about leaving gifts to charity in your Will.
The new pension component
The 2026 Budget has introduced a separate “pension component”, meaning that the “general component” will remain only those assets passing under the Will. This will mean the clauses continue to act.
PRs will have the option to combine the pension and general components, should they so wish. In some cases, this may be the most tax-efficient option, but they will not be forced to do so.
What the changes mean for Personal Representatives
These changes, while far from reversing what will be a significant change to IHT from April 2027, are welcome and will help to alleviate some of the concerns and practical difficulties that PRs will face.
How we can help
If you are concerned about how the changes to Inheritance Tax and pensions could affect your estate planning, please speak to our Tax & Estate Planning team for advice tailored to your circumstances.
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