For many years, pensions have been a valuable retirement planning tool and, in many cases, an effective way of passing wealth to the next generation. Because unused pension funds have often sat outside the inheritance tax (IHT) net, pensions have become an important part of estate planning for many families.
That position is changing.
From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person’s estate for IHT purposes. The change, originally announced at the Autumn Budget 2024 and now enacted in Finance Act 2026, represents one of the most significant reforms to the IHT regime in recent years.
What is changing?
Under the new rules, most unused pension funds and death benefits, referred to by HMRC as “notional pension property”, will be included when calculating the value of an individual’s estate for IHT purposes where death occurs on or after 6 April 2027.
This does not mean that every inherited pension will automatically suffer IHT. The final position will depend on the value of the estate, available nil rate bands, the beneficiary receiving the pension benefits and any relevant exemptions or reliefs. For example, payments to certain exempt beneficiaries, such as spouses and civil partners where the relevant conditions are met, may still be exempt from IHT.
However, for individuals with substantial pension savings, the change could significantly increase the amount of IHT payable on death.
In some cases, pension death benefits may also be subject to income tax, meaning families may need to consider both taxes when reviewing succession plans.
How will the new system work?
HMRC has now published a technical note explaining how it expects the new regime to operate in practice. Under the proposed process, the deceased’s personal representatives (PRs) will be responsible for identifying the deceased’s pensions, obtaining valuations, reporting the pension value to HMRC and paying any IHT due on the pension element of the estate.
Pension beneficiaries may also become jointly and severally liable for IHT attributable to pension benefits once those benefits have vested in them. This gives HMRC another route to recover tax if it is not paid by the estate.
The normal IHT payment deadline will apply. IHT on pension assets will generally be due by the end of the sixth month after the month of death, with late payment interest charged after that date. HMRC has confirmed that IHT due on pensions cannot be paid by instalments.
New administrative requirements
The reforms are likely to create additional administration for executors, pension scheme administrators and beneficiaries.
HMRC expects pension scheme administrators and personal representatives to exchange information so that the estate can be valued and any IHT can be calculated. HMRC has indicated that further guidance, templates and tools will be published before the new rules take effect.
There will also be new mechanisms to help with payment. In some cases, personal representatives may be able to issue a withholding notice requiring a pension scheme administrator to retain up to 50% of a beneficiary’s entitlement for up to 15 months after death. A separate pensions direct payment scheme should also allow pension funds to be used to pay IHT directly to HMRC in appropriate cases.
Will any reliefs still be available?
Some existing IHT reliefs will continue to apply. HMRC has confirmed that quick succession relief and the reduced 36% rate of IHT for estates leaving at least 10% to charity may still be available where the conditions are met.
However, the underlying assets held within a pension fund will not qualify for agricultural property relief, business property relief or loss on sale relief. This could be relevant where pension funds hold business assets, agricultural assets or investments that subsequently fall in value.
What should you do now?
Although the new rules do not take effect until April 2027, individuals with significant pension savings should begin reviewing their estate planning arrangements now.
In particular, it may be sensible to review:
The changes may affect families who have deliberately preserved pension funds while spending other assets first. That strategy may still be appropriate in some cases, but it should be reviewed in light of the new IHT rules.
Further HMRC guidance is expected before April 2027 and some practical details remain to be finalised. However, one thing is already clear: for many families, pensions will become a much more important consideration when reviewing IHT exposure and succession planning.
If you would like to review how these changes could affect your estate planning, please get in touch.
