Are NEST Death Benefits Subject to Inheritance Tax?

NEST death benefits are not currently subject to inheritance tax. Under existing rules the pot sits outside your estate, so it is not counted alongside your house, savings, and other assets when working out whether IHT is owed. That protection ends on 6 April 2027, when most unused pension funds will be brought within the scope of inheritance tax for the first time.

Why NEST Pots Sit Outside Your Estate Today

Section 151 of the Inheritance Tax Act 1984 leaves an interest in a registered pension scheme that ends on the member’s death out of account when valuing the estate.¹ NEST is a registered scheme, so the exemption applies to its death benefits.

The mechanism behind the exemption is the trustees’ discretion. A member submits a nomination or an expression of wish, but the trustees make the final decision on who receives the money. Because the member never held an absolute legal right to direct the funds, the pot is not treated as their property at death. NEST puts it plainly: the pot is “usually outside of your estate, which means it’s not normally subject to inheritance tax.”²

For context, the IHT nil-rate band is £325,000 per person and is frozen at that level until at least April 2030.³ Anything above it is taxed at 40%.⁴ Keeping the pension out of that calculation can make a real difference when other assets already sit near or above the threshold.

One caveat, even under current rules. If nobody nominated a beneficiary and the pot cannot be paid directly under NEST’s small-pot rule for balances of £5,000 or less, NEST pays into the estate.⁵ Once the money enters the estate it counts toward the IHT threshold with everything else the person owned, and probate slows the payment down.

What Changes on 6 April 2027

The biggest reform to pension death benefits in a generation takes effect on 6 April 2027. From that date, most unused pension funds and death benefits will be included in the deceased member’s estate for IHT purposes.⁶ A new section 150A of the Inheritance Tax Act 1984 will treat the member as beneficially entitled to their pension property immediately before death, regardless of any trustee discretion.⁷

For a NEST member who dies on or after 6 April 2027, the value of the pot will be added to the estate alongside property, savings, and other assets. If the combined total exceeds the £325,000 nil-rate band (or £500,000 with the residence nil-rate band for qualifying estates), IHT at 40% will apply to the excess.³ Income tax may still apply on top, depending on the member’s age at death.

Several important protections carry over into the new regime:

Transfers between spouses and civil partners who are long-term UK residents remain exempt from IHT.
Lump sums paid because the member died while still employed in a qualifying role (death-in-service benefits) are excluded from the new IHT charge.
Ongoing pension payments to dependants (dependants’ scheme pensions) are excluded.
If the member dies before 6 April 2027, the current rules apply even where the death benefits are not actually paid until after that date.⁶

Under the new rules, personal representatives will be responsible for reporting and paying any IHT owed on the pension property. The scheme administrator can become jointly liable if it fails to act on a valid withholding notice. IHT on pension property is due at the end of the sixth month after death, with interest running from that point.⁶

Income Tax Is a Separate Question

Inheritance tax is not the only tax that can bite a NEST death benefit. Even where IHT does not apply, income tax may. The treatment turns on the member’s age at death.

If the member died before age 75, the lump sum is paid tax-free, provided the scheme designates the funds within two years of the death.⁸ Miss the window and the lump sum becomes taxable: at the recipient’s marginal income tax rate if paid to an individual, or at a flat 45% if paid to a trust or a company.

The two-year clock runs from the date of death, not from when a beneficiary first contacts NEST. Any delay in notifying the scheme eats into the window. Problems usually arise when a NEST pension is discovered late, or when the member’s NEST ID cannot be found among their papers.

If the member died at age 75 or over, the lump sum is taxed as income in the hands of the recipient at their marginal rate. For 2025–26 that means 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, or 45% for those earning above £125,140.⁹ A large lump sum can push the recipient into a higher band than they usually sit in, so the effective rate may be steeper than expected. The two-year window does not matter here because the payment is taxed the same way whenever it is made.

There is also a cap on tax-free lump sums following a death before 75. The lump sum and death benefit allowance is £1,073,100 across all of a person’s pensions combined, and anything above that is taxed at the recipient’s marginal rate.¹⁰ Most NEST pots are nowhere near this figure, but the allowance runs across every scheme the member held, so a large lump sum elsewhere can eat the allowance before NEST’s payment is even processed.

Nominate Your Beneficiaries

The single most effective step you can take is to nominate beneficiaries. Log into your NEST account, choose “Add beneficiaries” from your dashboard, and select either “Make a nomination” or “Expression of wish.”¹¹ The percentages you allocate must add up to 100%.

A nomination is a more direct instruction. An expression of wish gives the trustees discretion to override your preference if circumstances change. Under either option the trustees weigh your stated wishes heavily. You can update the details at any time.

Without a nomination or expression of wish on file, NEST pays the pot into your estate.⁵ Today, that mostly means slower payment and a probate detour. After 6 April 2027, once pensions sit inside the estate for IHT purposes anyway, the difference between an estate payment and a direct payment to a nominated beneficiary is less about tax and more about speed and administration. Either way, keeping your nomination current is the cheapest thing you can do for the people you want to inherit.

A Note for US-Based Beneficiaries

If you are a US citizen or resident receiving a NEST death benefit, UK tax is only part of the picture. A NEST pension is a foreign financial account, which can trigger reporting on FinCEN Form 114 (FBAR) where your foreign accounts exceed $10,000 in aggregate during the year, though accounts held in a retirement plan of which you are a participant or beneficiary are exempt from FBAR reporting.¹² IRS Form 3520 may also apply if the pension is treated as a foreign trust for US purposes.¹³ Where UK income tax is withheld from the payment, you can generally claim a foreign tax credit on your US return to avoid double taxation, up to what you would owe under US law on the same income.¹⁴ These positions turn on details that a cross-border tax adviser should confirm before you file.

1
Legislation.gov.uk. Inheritance Tax Act 1984, Section 151
2
Nest Pensions. What Happens to My Pension When I Die
3
GOV.UK. Inheritance Tax Thresholds and Interest Rates
4
GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
5
Nest pensions. What Happens to My Retirement Pot if I Die Before Taking My Money Out of Nest
6
GOV.UK. Technical Note: Inheritance Tax on Pensions
7
HM Revenue & Customs. Draft Legislation (Accessible Version) – Inheritance Tax on Pension Interests
8
HM Revenue & Customs. Taxation of Lump Sum Death Benefits
9
GOV.UK. Income Tax Rates and Personal Allowances
10
GOV.UK. Find Out the Rules About Individual Lump Sum Allowances
11
Nest Pensions. Add or Change a Nominated Beneficiary
12
Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)
13
Internal Revenue Service. Instructions for Form 3520
14
Internal Revenue Service. The Taxation of Foreign Pension and Annuity Distributions