Inheritance tax on pensions

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.