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The New Inheritance Tax rules for Pensions: the implications and how to plan ahead
In her Autumn 2024 Budget, Rachel Reeves announced the intention of bringing unused pension funds and pension death benefits within the value of an individual's estate for Inheritance Tax (IHT) purposes from 6th April 2027. Following a lengthy consultation, HMRC published their response along with draft legislation on 21st July 2025, setting out the key changes and new responsibilities.
The current rules:
Unused pension pots and pension death benefits are not generally included in the value of an individual's estate for IHT purposes and therefore are not usually liable to IHT at 40%.
A summary of the new rules:
- For deaths after 6 April 2027, most unused pension funds and death benefits will be added to the value of a person's estate for IHT purposes whether or not the pension scheme administrators (PSAs) have discretion over the payment of death benefits.
- Therefore, where the estate is over the IHT threshold, IHT will be due at 40% on pension pots that the deceased may have hoped to pass down to loved ones.
- Death in service benefits are exempt and will not be included in the value of the estate.
- Most defined benefit pensions will be unaffected as these cannot usually be passed on.
- Unused funds passing to a surviving spouse or civil partner will be exempt.
Implications for personal representatives.
In addition to the tax implications outlined above, there are also implications for the executors of estates.
The government originally proposed that PSAs would be responsible for reporting on and paying any IHT due on unused pension funds within their schemes. However, following the consultation process, this policy has been amended and it is now the deceased's personal representatives (their executors or administrators) who will bear that responsibility. What does this mean in practice?
The personal representatives will:
- be required to contact each PSA to ascertain the pension value as at the date of death. This may be a lengthy process if the deceased had a number of pensions with different providers.
- be required to calculate any IHT due on the estate, including on the pension funds.
- need to report on and pay any IHT due within six months from the end of the month of death of the deceased.
- need to work out how best to pay the IHT which will depend on a number of factors including who benefits from the estate and the pensions.
All of this will need to be done while the personal representatives may well be grieving for their loved one.
If any IHT due is not paid within six months from the end of the month of death, then interest will accrue (currently at 8.00%). If the submission is delayed longer than 12 months then penalties may also be applied by HMRC.
How to plan ahead. Things to consider:
- Consolidating your pension pots or keeping clear details of all pension providers.
- Choosing your personal representatives carefully and considering appointing a professional.
- Using your pensions during your lifetime.
- Using part or all of your pension to purchase an annuity.
- Making use of other tax wrappers.
- Taking out insurance to cover any IHT liability.
- Making use of existing allowances to pass on your wealth such as the 'normal expenditure out of income' exemption.
- Reviewing your Will to ensure it is structured as tax efficiently as possible.
The above strategies need careful consideration on a case by case basis and you should seek independent financial and/or legal advice to help you decide which course of action is best suited to your personal situation.
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