In her Autumn Budget 2024, Rachel Reeves announced several measures to reform inheritance tax (“IHT”), including bringing most unused pension funds within the value of a person’s estate for IHT purposes from 6 April 2027.
The government believes that changes to pension rules over the past decade have made it easier for people to build up large tax-free pension savings, use other assets to fund retirement, then pass on unused pension pots without paying IHT (although income tax may still apply). To address this, it plans to bring pensions within the scope of IHT, aiming to prevent pensions being used as a tax planning tool and to apply IHT more consistently across different types of savings.
Consultation and legislative developments
In view of the very significant impact of the new rules on the IHT plans on so many people, speculation about the changes is understandable. In July 2025, the government replied to the technical consultation and released a policy paper and draft legislation. In September, a House of Lords sub-committee inquiry into the draft bill was launched to review what the impact of the changes may be in practice. Some comments and observations in relation to the proposed changes are set out below.
- Key provisions in the draft legislation: The draft legislation provides that most pensions will be deemed to be an asset of the estate on death and included for IHT purposes. There are already some other assets that are treated in this way such as jointly owned property and some trust interests. Death in service benefits will not be included.
- Responsibilities of personal representatives and beneficiaries: The Personal Representatives (“PRs” – executors or administrators) will become liable for reporting and paying any IHT due on the pension fund. Pension beneficiaries will be jointly liable for the IHT on the funds that they receive.
- Impact on pension scheme administrators: Pension scheme administrators (“PSAs”) will have to change their policies and procedures, invest in training and recruiting staff and potentially update their software. They will be required to provide the valuation information within four weeks of being notified by the PRs. Beneficiaries may direct PSAs to make IHT payments to HMRC. Pension scheme charges may consequently increase.
- Coordination between PRs and PSAs: The PRs and PSAs will have to liaise with each other to establish the IHT allowances, how these are apportioned between the PRs and PSAs and to arrange the IHT payment to HMRC. A calculator is proposed by HMRC to assist with this.
- Pay-Out delays and financial planning: At present, PSAs are usually able to deal with the payment of a pension on death This can be helpful to family members who may otherwise face financial difficulties. After 5 April 2027, pay-outs may be much slower. Individuals should consider arrangements to cover any short-term financial difficulties that might be faced by their family. Consolidating pensions now (if appropriate) will reduce the administrative burden for PRs after death.
- Pension types and IHT exposure: IHT will only apply if there is a fund or ‘lump sum’ to be passed on or paid out. Final salary schemes that are in payment and private pensions that have been used to buy an annuity will face no charge (unless the annuity payments continue). This may result in annuities becoming more popular.
- Spousal exemption and planning implications: A pension that passes to a surviving spouse will be exempt from IHT, following the rule for other assets. After April 2027, this may be the default option for most people where it is available. Until then, it may make sense to pass pension funds on death to younger family members (or into trust) to avoid adding to the estate of the surviving spouse if they do not need the pension income.
- Income tax and double taxation risk: Income tax may be payable by the recipients of the pension, especially if the pension scheme member dies over the age of 75 years. In many cases therefore, there will be a double charge on the assets. The pension fund will first suffer IHT at a rate of up to 40%, then the remainder will be subject to income tax, at the recipient’s rate (which could range between 0% and 45%).
- Lifetime gifting from surplus income: Unlike most assets, a pension cannot conveniently be given away, the funds must first be withdrawn, paying income tax as required. There is a potential silver lining as regular gifts made from ‘surplus income’ (over and above what someone needs to maintain their lifestyle) are exempt from IHT. This may therefore provide a route for people to pass on some of their pension wealth in their lifetime, without incurring the double tax charge. Some people have already started doing this. Care must be taken to keep detailed records of income and expenditure which will be required to claim this exemption after death.
- Residence Nil Rate Band considerations: The ‘residence nil rate band’ may increase the available allowances that can be claimed on death if (broadly) the individual leaves a home to their children or other direct descendants. However, this allowance is gradually reduced once the value of the estate exceeds £2 million. If pension funds are deemed to be a part of the estate, then more people will lose the benefit of the residence nil rate band, significantly increasing the overall IHT burden they face.
Speak to our team
To speak to a member of our private capital team, to understand how these changes may affect you, contact us online or call 0345 209 1000.
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