Government presses ahead with IHT on pensions - 22nd July 2025

IHT will apply on most unused pension funds from 6 April 2027, however, the Government’s consultation response outlines a significant change in the process and welcome changes to the scope.

While the Work and Pension Secretary, Liz Kendall distracted the press by announcing a review of the state pension age, the government quietly released the consultation response on the changes to pensions and inheritance tax (IHHT) on 21 July.   

The consultation outcome confirms that the fundamental change to pensions death benefits will go ahead from 6 April 2027 when most pensions will form part of the estate for IHT purposes. 

The consultation outcome did, however, announce a fundamental change to the process and provided welcome clarification on the scope of the changes.

The scope

In terms of scope the response confirmed

• All death in service benefits paid from pensions schemes will not form part of the estate.  This includes some benefits that do currently form part of the estate, such as those from the NHS pension scheme.

• Continuing dependant/beneficiary payments under a pension annuity are out of scope. However, any unused guaranteed payment period annuity will be included in the IHT calculations.

• Where a pension (SIPP or SSAS) holds assets that would otherwise qualify for business property or agricultural property relief, these exemptions do not apply. 

The process

The focus of the technical consultation was on how the new rules would be implemented with pension scheme administrators being responsible for reporting and paying the IHT due. 

Due to an overwhelmingly negative response from pension providers highlighting the many complications this would create, the government confirmed that the responsibility will now fall on the personal representatives (PRs). 

From 6 April 2027, PRs will be liable for reporting and payment of Inheritance Tax due on unused pension funds and death benefits.

Pension beneficiaries will become jointly and severally liable for any IHT due on unused pension funds and death benefits to which they are entitled from the point at which they become entitled.

Pension schemes will be required to make the liability position clear and explain to non-exempt beneficiaries (ie beneficiaries not covered by the spousal/civil partnership exemption) that IHT may be due on the pension when informing them about their benefits, how they can access them and options for paying IHT.

The consultation response states “where both income Tax and inheritance tax are paid on the same pension benefits, HMRC will develop mechanisms to account for any overpayments and ensure that these are refunded to beneficiaries.  We will need to wait for further information to see how this will work in practice.

The revised process will require personal representatives, pension scheme administrators to work together in a timely manner. The government will produce further legislation and guidance relating to this

Clearly there are still some complications and uncertainty with the revised process.   HMRC will begin further consultation with the pension industry almost immediately with the first workshops planned for this week. 

Source: Techlink Professional