After engaging with this content, which carries an indicative 30 minutes of CPD, you will be able to:
- Explain how pensions are cuurently treated in estate planning
- Explain how the treatment of pensions in IHT planning will change after April 6 2027
- Explain how the surplus income exemption might be used to mitigate IHT on pensions after 2027
The initial proposals were that the responsibility for reporting the value of a pension pot to HMRC, and paying any IHT arising, would fall on pension scheme administrators (PSAs).
In its response to the consultation, which was published on July 21 2025, the government has now confirmed that the PSAs' responsibility will be limited to:
- Informing the PRs of the value of the death benefits for IHT purposes within 4 weeks of receiving notification of the member's death.
- Based on the information provided by the PRs about the surviving potential beneficiaries, letting the PRs know how they have determined to distribute the death benefits, including how they are to be split as between exempt and non-exempt beneficiaries. This should allow the PRs to calculate the IHT liability and allocate it between the different pots.
- Settling the IHT due on the death benefits, either direct to HMRC or by repaying the PRs if they have settled the liability from the personal estate. This may not be necessary if the recipient of the death benefit decides they will pay the IHT themselves.
- Liaising with non-exempt beneficiaries, including to explain that IHT may be due on death benefits. It is worth noting that the rules about the recipient's income tax liability (as set out above, depending on the deceased's member at the age of death) remain, but any payments made towards IHT in circumstances where the deceased's member was over 75 should not be subject to any income tax in that it is envisaged that the recipient will be able to reclaim the income tax on the amount of IHT paid on the relevant amount of death benefit.
Our experience of dealing with HMRC would suggest that obtaining such refunds is unlikely to be straightforward or quick, but it is positive that the government have at least acknowledged and proposed how they will prevent the risk of double taxation.
It is worth noting that some pensions will not be within the scope of IHT, namely dependants' scheme pensions and death-in-service benefits (regardless of whether the scheme is discretionary or non-discretionary).
The latter is an improvement to the current position, whereby death-in-service benefits that are not discretionary are subject to IHT as part of the estate.
Implications for estate planning and the transfer of assets
Existing planning schemes, such as the one outlined above, are now no longer suitable if IHT mitigation is the aim.
Industry professionals are carefully considering how clients might want to restructure their estate planning before the new rules come into force on April 6 2027.
A traditional estate planning strategy is to reduce the size of one's estate by giving assets away.
Originally published by FT Adviser.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
