What are the recent pension law changes and implications for Inheritance Tax? 

The UK government has announced changes to the Inheritance Tax (IHT) treatment of pensions which will primarily impact how unused pension funds are handled upon the death of the pension holder. These changes will impact pension holders across the UK, including Northern Ireland.  

Pensions to become part of the estate for IHT purposes 

Currently, pensions are typically exempt from IHT after the death of the owner.  However, from 6 April 2027, most unused pension funds will be included within the deceased’s estate for IHT purposes. 

The idea behind this new change is to address concerns about pensions being used primarily as wealth transfer vehicles rather than for retirement planning, and to create a fairer tax system across different assets. 

Who is responsible for reporting and paying IHT on a pension?

From 6 April 2027, Personal Representatives (PRs) of the deceased’s estate will be responsible for reporting and paying IHT on unused pension funds and death benefits. Pension scheme administrators will assist PRs, including through a new Pension Inheritance Tax Payments Scheme. 

This means that any inheritance tax bill could be paid from other assets in the estate, but this might cause issues if the pension beneficiaries are not the same as those who inherited assets from other parts of an estate.   

A beneficiary can also ask the pension scheme administrator to pay the IHT due directly from the scheme – but only the portion relating to the pension. The pension provider must do this if certain conditions are met, including that the IHT bill for that pension is over £4,000.   

Potential for “double taxation” 

There is a concern about beneficiaries potentially facing both IHT and income tax on the same pension funds, particularly if the deceased died after the age of 75.  

If someone inherits a pension from someone who died over the age of 75 they will have to pay income tax at their own marginal rate on the money withdrawn. The changes could mean that income tax is payable after any IHT has already been deducted from the pension, meaning the inheritance could be double-taxed.  

Impact on estate planning and options for taxpayers 

Ahead of the changes coming into effect, it is advisable for pension holders to conduct  a review of their estate planning, especially for those with significant pension funds. Options include maximising current IHT exemptions and allowances, considering lifetime gifting, reviewing pension beneficiary nominations, exploring alternatives to leaving unused pensions intact (like taking tax-free cash or increasing withdrawals), considering life insurance in trust, and exploring Business Property Relief investments. 

Exclusions and exemptions 

Certain benefits remain outside the scope of IHT, including death in service benefits, dependant’s scheme pensions from defined benefit schemes, and charity lump sum death benefits. The spousal exemption for transfers between spouses and civil partners will also continue to be available.  

Next steps  

Further guidance is expected from HMRC before the changes come into effect on 6 April 2027. In the meantime, if you would like advice on how to plan for the upcoming changes, it is advisable to speak to a Chartered Tax Advisor.  

If you have any questions on queries related to IHT, or another tax issue, please feel free to contact our Tax Director, Liam Coulter.