Inheritance Tax and SIPP Property: Estate Planning Benefits

Under current UK rules, registered pension scheme assets — including property held within a SIPP or SSAS — do not form part of the deceased's estate for inheritance tax purposes. This means that a SIPP containing a commercial property worth £800,000 does not add £800,000 to the estate when the member dies. The £800,000 passes outside the estate to nominated beneficiaries, free of the 40% IHT charge that would apply to equivalent wealth held personally.

This IHT exemption is one of the most significant financial planning advantages of the pension wrapper. A business owner who holds their trading premises in a SIPP rather than personally — and who also has other personal assets — could save a substantial sum in IHT simply by virtue of the ownership structure. The IHT saving alone can run to hundreds of thousands of pounds for individuals with significant pension fund values.

Because of this advantage, experienced financial planners often recommend that individuals who do not need their pension income to fund retirement spending should leave their SIPP intact and use other assets (savings, ISAs, personal investments) for living expenses first. The pension is preserved as an IHT-efficient legacy vehicle, passed to the next generation at maximum value.

If a SIPP member dies before age 75, the pension assets can pass to nominated beneficiaries entirely free of both inheritance tax and income tax. Beneficiaries can take the full value of the SIPP — including the property, or the proceeds of a property sale — as a lump sum or as drawdown income, with no income tax charge. This makes dying before 75 with a SIPP particularly tax-efficient for beneficiaries.

For SIPP property, the mechanics are important: the property must either be sold within the SIPP (generating cash that can be passed to beneficiaries) or transferred in specie to the beneficiary's own pension (where it continues to grow tax-free). The former is more common in practice; the latter is available where the beneficiary has a pension capable of holding property and wants to continue the investment strategy.

The combination of no IHT and no income tax on a pre-75 death is essentially a zero-tax passage of wealth to the next generation. For a SIPP holding a property worth £600,000, the entire value passes to the beneficiary with no deduction. Held personally, the same asset could suffer 40% IHT (£240,000) before reaching the beneficiary.

In the Autumn Budget 2024, the government announced proposals to bring SIPP assets into the estate for IHT purposes from April 2027. Under these proposals, SIPP assets would be included in the estate and subject to IHT at 40% above the nil-rate band (currently £325,000, or £500,000 with the residential nil-rate band). This would significantly reduce the IHT advantage of the pension wrapper.

As of early 2025, the proposals are subject to consultation and have not yet become law. They may be modified before implementation, and there may be transitional provisions or exemptions. However, individuals with significant SIPP assets — particularly SIPP-held property — should review their estate planning in light of the proposed changes and consider whether any action is appropriate before April 2027.

Even if the IHT advantage is reduced, the income tax and CGT advantages of pension-held property remain unchanged. The pension wrapper will continue to be a highly tax-efficient vehicle for property investment; it simply may no longer be as powerful as a vehicle for IHT mitigation as it has historically been. We strongly recommend working with a specialist pension and estate planning adviser to review the implications for your specific position.

SIPP death benefits do not automatically form part of the estate and are not governed by your will. Instead, they are distributed at the discretion of the SIPP trustees or scheme administrator, who are guided by your nominated beneficiaries. It is essential to keep your nomination of beneficiaries form up to date — particularly after marriage, divorce, the birth of children, or the death of a previously nominated beneficiary.

For SIPP-held property specifically, the scheme administrator will need to decide how to deal with the property on death — sell it and distribute cash, or transfer it in specie. Your expression of wishes (which can accompany the nomination form) can guide the administrator on your preferences, though they retain discretion. A clear, recent expression of wishes avoids uncertainty for beneficiaries during what is already a difficult time.

For SSAS schemes, the position is slightly different: the remaining trustees play a more direct role in managing and distributing the assets on a member's death. The governing documents of the SSAS will determine the mechanism, and specialist legal advice is often needed to manage the process correctly. See our guide to winding up a SSAS for related detail.