The IHT treatment of pensions from 2027/28 - an update - 29th January 2026

The Economic Affairs Committee report on the Government’s proposals for the IHT treatment of pensions from 2027/28.

The draft Finance Bill 2025–26 was published by the Government on 21 July 2025 and a House of Lords Sub-Committee (the Economic Affairs Committee) was appointed on 2 September to consider technical issues of tax administration, clarification and simplification of the Finance Bill. The sub-committee launched an inquiry on 17 September to examine two measures relating to inheritance tax (IHT) in the draft Finance Bill: 

• Reforms to the IHT treatment of unused pension funds and death benefits;

• Reforms to agricultural and business property reliefs (APR and BPR).

In this bulletin we focus on the pensions and IHT reforms, with a further bulletin to follow with regards to the second bullet point. 

These reforms were first announced in the Autumn Budget on 30 October 2024 with a policy statement, then a technical consultation which resulted in significant changes to the proposals when the draft Finance Bill 2025-26 was published. Subsequent changes where announce on 26 November 2025 in the Budget. 

Evidence was presented, orally and in writing to the Committee, from which they have formed this report: “Inheritance tax measures: unused pension funds and agricultural and business property reliefs”. 

The report contains a good number of recommendations to the Government, many of which reference the lack of finalised support and legislation covering these reforms. It recommends that, unless clarity is available before 6 April 2026, then, these changes should be pushed back. In addition, it sees that the Pensions Dashboard needs to be fully implemented to ensure that Personal Representatives (PRs) can easily access all the scheme details needed to process the estate efficiently. 

One of the biggest concerns with regards to IHT for both pensions and the BPR/APR reforms is with regards to payment deadlines with the view of the need to extend these from six to twelve months as it appears unreasonable, at least initially, for the usual deadline to be met. It is suggested that this can be reviewed once bedded in but, as the changes are significant, pension schemes and providers should be given time to ensure their systems can cope with the tight deadlines needed to avoid penalties on the PRs.

There are also a number of recommendations with regards to timescales in pension schemes, not being feasible to process the requirements put on them. For example, the already increased 35 days to pay the IHT charge following a request from the beneficiary, should there be illiquid assets. In addition, the four weeks to provide a valuation. This is positive because, for many underlying assets, this just isn’t possible. 

The full list of recommendations with regards to pensions and IHT are as follows:

• The Government introduce a statutory safe harbour from late payment interest for PRs, where they can evidence that they took reasonable steps to try to meet those deadlines but that the reason for not meeting the deadline was outside their control.

• The six-month IHT payment deadline be extended to 12 months for IHT on pension assets for a transitional period, so that PRs have a more realistic timeframe in which to meet their IHT liability while Pension Scheme Administrators (PSAs) update their processes.

• The Government should implement a soft-landing period in which late payment interest and penalties will be suspended as the new rules bed in, for a minimum of two years.

• HMRC monitor payment dates for IHT, comparing the position for those estates that include pension assets and those that do not, over any soft-landing period, to evaluate whether further easements are needed because of this measure. HMRC should publish details of its findings.

• The Government works with pension sector representatives on how to adapt the existing Tell Us Once service so that it can be accessed by PSAs, so that PRs do not need to notify individual pension schemes separately after a member’s death.

• The information sharing regulations include a verification process for confirming the identity of PRs, given the importance of the PSA sharing information before probate is granted.

• HMRC work with pension sector representatives to provide pro forma letters and other documents that PRs can use to request information from PSAs.

• HMRC work with PSAs to adopt uniform procedures, to ensure they respond quickly to information requests from PRs.

• The Government revisit the four-week timeline for provision of valuation information by PSAs to PRs, particularly in relation to illiquid assets held within a scheme. A longer, more realistic timescale is needed.

• For assets where it will be impracticable to obtain a valuation within the relevant period, the Government allow an approximate value to be initially provided with formal valuation, and any amendments to IHT accounts provided later.

• The Government should not prioritise an April 2027 start date over getting the policy and the processes right. It is important that it takes the time now to find a workable process for managing the IHT process for pensions rather than rush to a solution that falls short of what is needed.

• Stakeholders must be given an appropriate and reasonable period of time to review and comment on draft information-sharing regulations and related guidance. The Government should set out a timetable for next steps in finalising the processes, so that PSAs have a roadmap to guide their planning for getting ready for the change.

• The Government should ensure that the Pensions Dashboard is live before April 2027, and that its functionality allows PRs to access it to find out about a deceased person’s pensions arrangements.

• The Government should ensure that, as matter of priority, steps are taken to show all of an individual’s pension schemes in the Pensions Dashboard, including those in drawdown.

• HMRC should clarify by Spring 2026 what steps a PR needs to have taken for HMRC to be satisfied that they have made “every effort” to identify pension funds.

• The Government must work with relevant stakeholders to consider whether further changes are needed to its proposed PR-led process to ensure that PRs have realistic options available to them to manage liquidity challenges.

• In addition to the changes announced at Budget 2025, the Government needs to be open to considering further changes to the PR-led process to help protect PRs from personal liability as a result of matters outside their control.

• No later than April 2026, HMRC publish guidance on how the DPS (Direct Payment Scheme - akin to Scheme Pays for annual allowance charges) and retention mechanism are intended to work. This guidance should be in a form that can be used by PSAs in their communications with pension beneficiaries.

• The Government work with PSAs on an ongoing basis to understand whether they are being required to sell assets at a loss in order to meet IHT deadlines, with a view to considering a possible loss-in-sale relief for both land and qualifying investments held in an individual’s pension scheme, as it is where such assets are held directly.

• HMRC needs to continue to work with the relevant stakeholders, particularly legal and tax bodies, to understand and mitigate their concerns about the risks facing professional PRs.

Source: Techlink Professional. This is a news bulletin and is up-to-date as of the date of publishing. Please check the publishing date at the top of the article.