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This article has not been updated with the announcements in the Autumn budget 2025. Further information on the budget announcements can be found in our Budget 2025 articles.
Three key takeaways
- Unused pension funds will be within the estate for IHT purposes.
- Legal personal representatives will be responsible for reporting and paying tax on the estate, including the pension.
- There are three options for payment:
- Pay from free estate
- Pay IHT due on pension from pension via pension scheme administrator (PSA)
- Beneficiary takes pension in full and pays IHT directly
Executive summary
As announced in the Autumn Budget 2024, the Government will introduce legislation in the Finance Bill 2025-26 to include the value of unused pension funds and pension death benefits within the member’s estate on their death, regardless of whether the scheme has discretion over the payment of any death benefits. This measure will take effect in respect of deaths on or after 6 April 2027 with the policy intention to prevent pensions being used as a tax planning vehicle to transfer wealth.
Legal personal representatives (LPRs) will be responsible for paying the IHT on the pension scheme where due. This outcome was a result of significant industry feedback around the complexity and likely delays that would be introduced if pension schemes themselves were responsible for IHT payments. The existing inheritance tax principles, providing an exemption for death benefits passing to a surviving spouse/civil partner and registered charities, will be maintained.
The Government estimates that, of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 estates will have an inheritance tax liability where previously they would not. Approximately 38,500 estates will pay more inheritance tax than would previously have been the case. The average inheritance tax liability is expected to increase by around £34,000 when pension assets are included in the value of the estate.
Death in service benefits payable from both discretionary and non-discretionary registered pensions schemes will be excluded from inheritance tax.
Income tax treatment on beneficiaries taking inherited pensions remains unchanged – pre 75 tax free, post 75 taxed at marginal rate. Income tax will not be due on the amount of relevant death benefits equal to any inheritance tax due on that pension.
Liability for reporting and paying inheritance tax on unused pension funds and death benefits
LPRs will be liable for reporting and payment of inheritance tax due on unused pension funds and death benefits from 6 April 2027.
Pension beneficiaries will become jointly and severally liable for any inheritance tax due on unused pension funds and death benefits to which they are entitled from the point at which they are appointed.
Pension schemes will be required to make the liability position clear and explain to non-exempt beneficiaries (such as beneficiaries who are not spouses or civil partners) that inheritance tax may be due on the pension when informing them about their benefits, how they can access them, and options for paying inheritance tax.
LPRs will be required to notify pension scheme administrators (PSAs) of a scheme member’s death, and PSAs will be required to share the value of any unused pension funds or death benefits with the LPR within four weeks of receiving notification of the member’s death. LPRs will then collect information from each PSA and other components of the estate to reach a total valuation of the estate and determine whether any inheritance tax is payable.
Most non-taxpaying pensions will see no difference at all after LPRs have confirmed that no inheritance tax is due on the estate. PSAs will be able to proceed as normal to pay out benefits as soon as trustees have completed their discretionary processes and identified the correct beneficiaries.
Process for reporting and paying inheritance tax on unused pension funds and death benefits
LPRs are required to pay inheritance tax before they can apply for probate and distribute the assets in the estate. To mitigate any liquidity challenges, LPRs and pension beneficiaries (once appointed) will have several options to pay inheritance tax due on unused pension funds and death benefits, as follows:
- Pay directly from the free estate: LPRs can pay the inheritance tax due on the entire estate — including the pension component — directly from funds in the free estate, then proceed to apply for probate. If the beneficiaries of the free estate and the pension beneficiaries are the same, they can then take their pension benefits in full. If the free estate beneficiaries and pension beneficiaries are not the same, LPRs can use their existing legal right of reimbursement from pension beneficiaries to reclaim the value of the inheritance tax paid on the pension and distribute this to the beneficiaries of the free estate.
- Pension beneficiaries direct PSAs to pay: The Government will set up a new scheme through which beneficiaries can direct the PSAs to pay the inheritance tax on their behalf directly to HMRC.
- Pension beneficiaries take their pension benefits in full and pay inheritance tax directly.
Income tax will not be due on the amount of relevant death benefits equal to any inheritance tax due on that pension. HMRC will ensure that there are mechanisms in place for pension beneficiaries to recover any overpayments of income tax, if needed.
There are several existing mechanisms to help LPRs raise funds to pay inheritance tax. These include the direct payment scheme, which can be used to transfer money from the deceased’s account(s) before probate is granted, and the ability to pay the inheritance tax on certain assets that may take time to sell by annual instalments. Once the first instalment (and any others due when the plan is set up) has been paid, LPRs can proceed to apply for probate.
If unable to pay the inheritance tax due on the pension, LPRs will need to wait for the pension beneficiaries to be appointed before the tax can be paid. At this point, the pension beneficiaries will become jointly and severally liable for the inheritance tax on the pension.
Summary of the proposed process
The following illustrates how the process is expected to work in practice. The process may not operate in a linear fashion as laid out in the stages below – for example, it is likely that some of the stages below will overlap. Further guidance is expected from HMRC for personal representative, pension schemes and beneficiaries in the coming months.
- LPRs will, as now, identify the pension schemes of which the deceased was a member and contact the relevant PSAs to inform them of the member’s death.
- Once PSAs are aware of a member’s death, they will begin their processes to determine how benefits are to be distributed.
- Regardless of the nature of the scheme, PSAs must tell the LPRs the value of the pension for inheritance tax purposes within four weeks of receiving the member’s death notification.
- The PSA will tell the LPR how the pension benefits will be split between exempt beneficiaries (such as spouses and civil partners) and non-exempt beneficiaries.
- The LPR will collect information from each PSA and other components of the estate to reach a total valuation of the estate and determine whether an inheritance tax account should be returned to HMRC.
- The LPR will inform the PSA(s) that an account is required, provide the inheritance tax reference number, and request identity information about the pension beneficiaries.
- If no inheritance tax account is required, LPRs can tell the pension beneficiaries (if known) and the PSAs that no inheritance tax is due.
- LPRs can proceed to apply for probate and distribute the assets in the estate.
- PSAs will proceed to complete their processes to determine beneficiaries and distribute benefits.
- If an inheritance tax account is required but no inheritance tax is due, LPRs will return an account to HMRC, providing the value of the estate including the value of any pension benefits as established and beneficiary details (Stage 2). They can then proceed to apply for probate and distribute the assets in the estate.
- If inheritance tax is due, LPRs will establish how much inheritance tax is attributable to the different pension components of the estate and submit an account to HMRC.
- LPRs will inform the pension beneficiaries (if known) and the PSA of the amount of the inheritance tax due on their component of the estate.
- There are then several ways that the inheritance tax on the pension component of the estate can be paid, as set out earlier in this document.
- Once the pension beneficiaries have been identified, the PSA will tell them the amount of pension funds and benefits they have inherited. They will also set the options for how the beneficiary can take the pension (such as lump sums or forms of pension income).
- Exempt beneficiaries (including spouses and civil partners) will be able to take their benefits immediately.
- For non-exempt beneficiaries, the PSA will explain that inheritance tax may be due on the pension. They will also explain that, as pension beneficiaries, they are now jointly and severally liable with the LPR for any inheritance tax due on the pension benefits they have inherited. The pension beneficiary then has options for how to pay any inheritance tax due on the pension, as set out earlier in the document.
- If the pension beneficiary directs the PSA to pay their inheritance tax liability, these payments will be authorised payments and will not be subject to income tax (where applicable).
- If inheritance tax is due, and the pension beneficiary does not direct the PSA to pay, they may end up paying income tax on the benefits they receive. In this scenario, pension beneficiaries will need to contact HMRC to request a refund of income tax.
- LPRs will be responsible for managing any amendments to the estate and submitting any amended inheritance tax accounts to HMRC.
- If an amendment results in more inheritance tax being due, the LPR will contact the pension beneficiaries (or PSA if the beneficiaries are not yet known) and inform them of the increase. The additional inheritance tax can be paid through one of the routes set out within this document.
- If an amendment results in less inheritance tax being due, a refund is due (normally after the deceased account is settled). When refunds are issued, LPRs are responsible for distributing these to the appropriate beneficiaries.
- When pension beneficiaries are informed of any amendments to the inheritance tax on the estate, they will need to contact HMRC directly if any corresponding adjustments are needed to the income tax due on their pension funds.
Need more help?
Speak to our experienced team. You can reach them Monday to Friday, 8.30am to 4.30pm, by either calling 02380 726 010 or emailing:
- Pensions technical queries – pensionstechnical@quilter.com
- Life and trust technical queries - taxandtrusts@quilter.com
The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.