Last year’s Autumn Budget brought with it the announcement that most unused pension funds and death benefits payable from a pension will be brought into a person’s estate for inheritance tax purposes from 6 April 2027. The Government recently published a response to its technical consultation on the processes required to implement this change, together with draft legislation for inclusion in the Finance Bill 2025-26 later this year.

The response confirms several changes to the original proposals, although the overall policy intent remains the same. However, the revisions have given rise to some novel issues which may yet lead to further changes.

The current position: pensions largely exempt

The current position is that pensions and lump sums payable from a registered pension scheme after a member’s death are generally not part of the member’s estate or chargeable to IHT. The Government believes that this favourable IHT treatment has made pensions an attractive vehicle for passing wealth to the next generation, rather than for their intended purpose of funding retirement, allowing potentially substantial sums to be transferred without incurring the 40% IHT charge.

The 2027 revolution: bringing pensions into the IHT net

From 6 April 2027, property held under a registered pension scheme which can be used to provide relevant death benefits after a person's death will be treated as part of the person's estate for IHT purposes. This will be the case regardless of any discretion that exists over the payment of the relevant death benefit.

Relevant death benefits will include all pension death benefits and lump sum death benefits, except a dependants' scheme pension or a death-in-service benefit. 

The exclusion of death-in-service benefits is one of the key changes to the proposals following consultation. For these purposes, death-in-service benefits will be defined as lump sum death benefits which are payable only if the member was an active member of the scheme, and in employment of a description specified in the terms of the scheme, immediately before their death. This removes the incentive that might otherwise have arisen for employers to provide death in service benefits through excepted group life policies, but may give rise to uncertainty in some cases (e.g. where the member retains a salary link following closure to accrual).

The existing IHT exemptions for spouses, civil partners and charities will, however, continue to apply.

New process for reporting and paying IHT

The Government originally proposed that pension scheme administrators (or PSAs – this will typically be the trustees), rather than personal representatives (PRs), would become liable for the reporting and payment of any IHT on the pension component of an estate. Responses to the consultation highlighted that this would have given rise to a significant additional administrative burden for pensions schemes. As a result, the Government has decided not to proceed with this model. Instead, PRs will be liable for reporting and paying IHT on pensions from 6 April 2027. 

Trustees will, however, have important new duties under this PR-led process. Perhaps most significantly, the beneficiary of a relevant death benefit on which there is an IHT liability will be able to give a notice requesting the PSA to pay the IHT direct to HMRC. The PSA must then pay the amount of tax specified in the notice within 3 weeks of receipt of the notice if: 

• the amount does not exceed the beneficiary’s entitlement under the scheme that has not yet been paid;
• the notice complies with any requirements prescribed by HMRC; and 
• the amount is £4,000 or more. 

If the PSA fails to pay the IHT within 3 weeks of receipt of the notice, the scheme administrator will become jointly liable for the IHT.

Trustees will also face extensive new information sharing obligations. You can read more about this in our most recent edition of Trustee Agenda.

What happens next?

As highlighted above, the legislation is due to be included in the Finance Bill 2025-26 later this year. However, it is worth noting that significant concerns have been raised in response to the consultation on the draft legislation relating to the difficulties likely to be faced by PRs. These range from how PRs can ensure they obtain the information they need from pension schemes, to dealing with liquidity challenges where PRs are liable for IHT on pensions but do not have access to the pension funds. The House of Lords Finance Bill Sub-Committee has issued a call for evidence which recognises these issues.

Whether or not the Government reconsiders its approach in light of these issues remains to be seen. We will provide further updates following this year’s Autumn Budget and publication of the Finance Bill.

In the meantime, please speak to your usual Linklaters contact for further information.