Inheritance Tax on Pensions
What’s changing - (and what you need to do)
Big news in the world of pensions!
Under current rules, Inheritance tax does not apply to unused pension funds on death but from April 2027, Inheritance Tax (IHT) will apply to pension death benefits. While the original pension proposals had more than a few people scratching their heads, the updated version is fortunately clearer and more practical. And we’re about to make it even clearer for you with our quick lowdown on what you need to know.
The New Role of Personal Representatives
The pension scheme administrators won’t be handling IHT paperwork going forward. Instead, the job will fall to personal representatives (PRs), i.e., those managing the deceased’s estate. They’ll be responsible for valuing pension benefits, reporting to HMRC, and making sure the tax gets paid.
The four-step process
Step 1. Valuation time
Scheme administrators have four weeks from the date of death to send PRs a valuation. If the scheme has discretion, they’ll also break down how much goes to exempt beneficiaries (e.g., spouses) and how much might be taxable.
Step 2. Estate crunching
PRs gather pension values and combine them with other assets to figure out if IHT is due.
Step 3. Reporting to HMRC
If tax is owed, PRs submit an account and let beneficiaries know what they’re on the hook for.
Step 4. Paying the benefits
If the benefits go to a spouse or fall below the nil-rate band, they can be paid out straight away. For others, things get a little more complicated.
In other cases, beneficiaries and PR’s will be jointly and severally liable for their share of the death benefits. If the PR’s haven’t settled the IHT due on the death benefits they will have two options:
· Ask the scheme administrator to pay the IHT due, directly to HMRC
· Take the pension benefits (taxable, if the deceased died after the age of 75). HMRC have confirmed that the amount chargeable to income tax will be reduced by the beneficiaries IHT liability.
Alternatively, the PR’s can pay the IHT liability in full from other assets held in the estate. If the estate beneficiary and pension beneficiary are the same person, the death benefits can be paid without any deduction from the pension. If they are not the same person, the PR;’ have a legal right to reclaim the IHT on pension death benefits from the pension beneficiary and distribute this to the estate beneficiaries. This is to ensure that the burden of IHT is spread fairly amongst all beneficiaries.
Additional Clarifications from HMRC
Death in service benefits are excluded from IHT, no matter how they’re provided.
Joint life annuities are also safe, with survivor benefits not considered part of the deceased’s estate.
Trivial commutation lump sums under £30,000 will usually be taxed unless they come from a dependant’s scheme pension.
And there you have it! Though we’ve relayed all that’s known at the moment, it’s worth bearing in mind that the proposal is still in the drafting stages and things could change.
Want to know a bit more? Have any queries?
Our expert team at Redwood can help you navigate the new IHT landscape and ensure your legacy is passed on efficiently and tax-effectively.
Call us on 01268 776277 to speak with one of our friendly financial planners.
*Please note, the information provided in this article could be subject to change in line with UK law and legislation, this article was created 22.08.25. Statistics and data from this article: National Tax Foundation
