Inheritance Tax (IHT) treatment of unused pension funds and death benefits
From 6 April 2027, most unused pension funds and death benefits will no longer fall outside the scope of inheritance tax (IHT). As a result, more pension assets may be subject to IHT on death. This represents a significant change from the current rules, under which these funds are largely excluded from IHT.
Individuals with significant pension savings should review their estate plans carefully. Under the new rules, beneficiaries could face an IHT charge on inherited pension funds.
There are, however, some important exceptions. Death in service benefits from registered pension schemes, and dependants’ pensions from defined benefit or collective money purchase schemes, will continue to be exempt from IHT.
Responsibility for reporting and paying this tax will rest with personal representatives, rather than pension scheme administrators. This shifts additional responsibility onto personal representatives, who may need to manage withholding arrangements and settle any IHT due before pension benefits are released.
As announced as part of the Budget 2025 measures, from 6 April 2027, where a deceased person’s estate is expected to owe IHT, their personal representatives may instruct the pension provider to withhold 50% of taxable pension death benefits for up to 15 months. They must then pay any IHT due to HMRC before releasing the remaining funds to beneficiaries. This withholding mechanism does not apply to exempt benefits, small pension pots (under £1,000), or ongoing annuities. Personal representatives will also be discharged from liability for pension assets discovered after they have received clearance from HMRC.
How Moore South can help
The proposed changes to the IHT treatment of pension funds represent a significant shift in estate planning and administration. Individuals with substantial pension savings, as well as executors and personal representatives, will need to understand how pension assets interact with IHT liabilities and cash flow on death.
Moore South advises individuals, families and personal representatives on inheritance tax planning, pension considerations and estate administration, helping ensure liabilities are identified early and managed efficiently.
Contact Moore South to discuss how the 2027 pension and IHT reforms may affect your estate planning.