Changes afoot for inheritance tax on pensions from April 2027

In their autumn budget 2024, the government announced that from 6 April 2027, most unused pension funds and death benefits would be subjected to inheritance tax (IHT). Whether you’re managing your own finances or someone else’s estate, now is the time to start preparing.

The key change: executors take the lead

Originally, it was proposed that pension scheme administrators would be required to report and pay IHT. However, that responsibility will now fall on the personal representatives (PRs) of the estate.

It follows that pension pots will be treated like other estate assets for tax purposes, which PRs will now oversee and ensure IHT is paid on time. For many estates, it is likely this may add a layer of complexity to their administration.

New information requirements and tight timeframes

An information sharing framework will be introduced under which PRs will be responsible for notifying all relevant pension providers and providing details of the beneficiaries. In return, pension scheme administrators must provide key information to PRs within four weeks, including:

• The value of unused pension funds or death benefits as of the date of death
• A breakdown of how much is going to exempt beneficiaries (such as a spouse or civil partner) versus non-exempt individuals
• Personal details of the beneficiaries to assist with the IHT return.

These requirements place a time-sensitive burden on both PRs and pension administrators with the deadline for the calculation and payment of IHT six months from the end of the month of death still applying and attracting interest for late payment.

These timelines could create challenges in cases where pension trustees take longer to identify or determine beneficiaries, or where asset valuations are complex. Parties will need to act quickly which, in turn, highlights a need for accurate and up to date record keeping.

Paying the tax – who and how?

The technical consultation recognises the difficulties PRs may experience in accessing non-cash assets to settle any IHT. To mitigate, there are options to settle the IHT:

• PRs can pay all IHT due from the free estate if there are sufficient funds, either in instalments or using the direct payment scheme
• Beneficiaries may ask pension administrators to pay all IHT on the estate out of the pension, before they receive it
• Beneficiaries can take the full pension benefits and pay IHT directly.

There is potential for double taxation where pension drawdown funds may be used to pay the IHT, but HMRC will introduce an income tax refund mechanism to recover any overpayments of income tax, if needed.

It’s worth noting that once beneficiaries are identified, they become jointly and severally liable for any unpaid tax which means that if one person can’t pay, HMRC can pursue the other beneficiaries.

Death-in-service benefits spared

Death-in-service lump sums (i.e. multiple-of-salary lump sums) paid from registered pension schemes will not be included in the IHT calculation. This recognises that employers offer these benefits, generally, as a financial protection for families.

What should you be doing now?

If you’re an individual with a substantial pension pot, it’s worth revisiting your estate plans to explore accessing funds earlier, reviewing your nominated beneficiaries, or ensuring your estate has sufficient liquid assets to cover potential IHT liabilities.

Executors should familiarise themselves with the new rules and ensure they have processes in place to gather pension data.

Pension scheme administrators and trustees will need to update internal procedures and handle tight response times.

Employers offering death-in-service benefits should update employee communications and benefit statements in due course to reflect the revised tax treatment.

These changes mark a significant shift in how pensions are treated for IHT purposes. The detail will be in the final legislation when published, but with new responsibilities, strict timelines, and potentially higher tax exposure, it’s essential to plan ahead by speaking to your advisers well before the April 2027 deadline.