A recent poll on pensions by AJ Bell suggested that charging inheritance tax on pensions was the Labour government's most unpopular change so far, with 44% of the 2,050 adults surveyed being opposed to the proposed changes, with only 21% in favour. That hasn't, however, resulted in the government substantively changing its proposals following the publication on the 21 July 2025 of its response to the technical consultation on the subject, albeit some of the practical changes are welcomed.
The current position is that most pension pots fall outside of the inheritance tax net as long as the pension scheme trustees have discretion over the payment of death benefits. In most cases, such discretion is exercised whilst taking into account the wishes of the deceased, usually by way of a nomination form signed during their lifetime. This has provided good opportunities for estate planning, given that pensions can be left to beneficiaries who do not benefit from any inheritance tax exemption e.g. children or grandchildren, whilst the deceased's estate can pass to an exempt beneficiary, often a spouse or civil partner. This sort of planning has allowed many to minimise the inheritance tax arising on their death, particularly where individuals are able to draw on assets other than their pension to fund their retirement.
The proposed new rules mean that from 6 April 2027, the majority of pension pots – whether the trustees have discretion over how the funds are distributed or not – will fall into the inheritance tax net. The initial proposals were that the responsibility for reporting the value of a pension pot to HMRC, and pay any inheritance tax arising, would fall on pension scheme administrators (PSAs). Thankfully the government has decided that such responsibility will now fall to the personal representatives given that they will already be dealing with the deceased's estate, a move which will be welcomed by advisers who either act as professional executors or advise personal representatives on administering estates. However, it is still of no solace to the thousands of people whose previously inheritance tax-free pensions will after 6 April 2027 fall within the scope of inheritance tax.
Despite it being good news that PSAs will no longer be responsible for paying inheritance tax, there will still be several practical difficulties resulting from the proposed changes, not least if the recipients of the pension pot and the beneficiaries of the estate are different people, potentially with different interests and needs. Unpaid inheritance tax begins accruing interest from the end of the sixth month after the month of death, and this could be particularly problematic given the current rate of interest charged by HMRC is 8.25% per annum, with many viewing this high rate of interest as a ‘stealth tax'. In our experience, arranging for the release of funds within 6 months of death is often a painfully bureaucratic process, and this will add another layer of complication. Some respondents to the consultations had suggested that the deadline for payment could perhaps be extended, given the practical issues, but this was rejected by the government.
The more positive developments arising from the technical consultation were the government's acceptance that death in service benefits held in registered pension schemes will now not be in the scope of inheritance tax regardless as to whether the scheme is discretionary or non-discretionary, and that where there is potential for double taxation (e.g. where the deceased is over 75, meaning that the recipient(s) of the pension pot would be subject to income tax) this will be reduced by recipients receiving an income tax refund (although history would suggest that the process of claiming an income tax refund won't be without its difficulties).
There is no doubt that there will be a huge amount of work to be done by PSAs and professionals involved in estate planning to prepare for the changes. In particular, those with significant pensions will want to review their Wills / estate planning to ensure these are still fit for purpose.
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