Pensions, Inheritance Tax, and changes from 6th April 2027

The proposal was open to consultation, which closed on 22nd January 2025, although the Government had only consulted on the mechanics of personal representatives and pensions scheme administrators collaborating for the IHT due. We investigate some of the key questions relating to this.

Inclusion of Pension Funds in Estate Valuation

The Government has said that the changes will apply equally to UK-registered pension schemes and Qualifying Non-UK Pension Schemes (QNUPS). From April 2027, unused pension funds and death benefits will be included in the estate’s value for IHT purposes. This change applies to both Defined Contribution (DC) and Defined Benefit (DB) schemes, ensuring consistent treatment across different types of pension arrangements. The distinction between discretionary and non-discretionary schemes will be eliminated, meaning all pension benefits will be subject to the same IHT rules.

The only exceptions are dependent’s scheme pensions and charity lump sum death benefits. However, those changes do not seem to apply to life policy products purchased with pension funds or death-in-service benefits under separate arrangements. Life insurance policies written in trust appear to remain outside the scope of IHT.

What will be the process for reporting and paying Inheritance Tax?

One of the main concerns is how this change will work in practice. At present, when someone dies, their personal representatives (PRs) are responsible for reporting and paying any IHT due on the estate.

However, the consultation document outlines a new process for Pension Scheme Administrators (PSAs) to report unused pension funds and death benefits to HMRC and pay any IHT due. This process requires collaboration and information sharing between PSAs and PRs of the deceased’s estate, and HMRC. PRs will need to inform PSAs whether any IHT is due, and PSAs will report details to HMRC only when there is an IHT liability.

One could suggest that the reason for imposing this liability on PSAs is that, if there were insufficient liquidity in the estate to pay the IHT on the pension, withdrawing funds from the pension could also trigger an income tax charge on the beneficiary of the death benefits (who may not be the same person as the PRs in any event). Therefore, the double tax charge can be avoided if PSAs are able to pay the IHT directly from the pension pot, as well as issues where there is a mismatch between the PRs and the beneficiaries of the pension.

The deadline for PSAs to pay any IHT due will be the same as for PRs: six months after the death (after which late payment interest applies, currently at 8.5%). There is a concern that this is simply not enough time for the IHT to be calculated and paid in more complicated situations (for example where the deceased left no Will or had multiple pension pots), which will lead to interest accumulating and greater stress for bereaved family members.

How to mitigate the new rules?

Generally, we expect that individuals will wish to mitigate the impact of the new rules by maximising IHT reliefs across the rest of their estate, for example, investing in IHT-exempt assets such as Venture Capital Trusts (VCTs) and business or agricultural property (within the new £1 million limit), making lifetime gifts, including gifts of normal expenditure out of income withdrawn from a pension, and perhaps even marrying long-term partners to secure the spousal exemption. Taxpayers who previously have contributed excess cash to their own pensions may now consider topping up family members’ pensions.

In addition, individuals may wish to review their death benefits nominations to ensure that their wishes are up to date and, where possible, adapt them to the new rules.

Pension changes

In conclusion, the changes to the treatment of unused pension funds and death benefits for IHT purposes, effective from 6th April 2027, will have significant implications for estate planning. The inclusion of these funds in the estate's value for IHT purposes means that individuals will need to carefully consider their pension arrangements and death benefit nominations. It is advisable to review and possibly update these nominations to ensure they align with the new rules. By taking proactive steps, individuals can better manage their estate planning and minimize the potential tax burden on their beneficiaries.

If you consider you need advice on how your pension death benefits impact your estate planning and would like any advice on any points featured in this article, please contact our Private Client Team at Thackray Williams on 020 8290 0440.

Useful link: Technical Consultation – Inheritance Tax on pensions: liability, reporting and payment