The Government has published a response to its consultation 'Inheritance Tax on pensions: liability, reporting and payment'. From 6 April 2027, unused pension funds will form part of an individual's estate for Inheritance Tax (IHT) purposes, with the Personal Representatives (PRs) becoming liable for the reporting and payment of IHT.
Background
Currently, many Pension schemes do not form part of an individual's estate on death for Inheritance Tax (IHT) purposes.
It was announced at the 2024 Autumn Budget that this would change from 6 April 2027, with unused pension funds and death benefits becoming subject to IHT in the same way as other assets forming part of an individual's estate.
In October 2024, HMRC published a Technical consultation on the processes required to implement this change.
- The consultation proposed that Pension Scheme Administrators (PSAs) would be liable for reporting and paying any IHT due on pensions to HMRC.
Currently, death in service benefits are only subject to IHT where the pension scheme or trust from which it is paid is non-discretionary.
- The consultation proposed that all Lump sum death benefits be brought into scope for IHT, which includes death in service lump sum payments.
Responses
The consultation received 649 responses:
- Many supported the principle of bringing pensions into the scope of IHT.
- The majority strongly opposed making PSAs liable for reporting and paying the IHT due on the pension element of the estate.
- Most agreed that unused pension funds or death benefits should only be reported when there is an IHT liability and that additional reporting requirements should be minimised if no tax is due. It was felt that most estates would have an additional administrative burden.
- A significant number were unclear of the IHT position after the six-month payment deadline if the PSAs had not received the relevant information from the PRs.
- A common suggestion was to extend the six-month payment deadline to 12 months or two years and that the 'clock' should start from the date the PSA is notified of the death rather than the date of death.
- Another suggestion was to introduce new statutory duties on PRs and PSAs to ensure relevant information is provided within a particular timeframe.
- A small number supported making PSAs and beneficiaries jointly and severally liable to IHT 12 months after the end of the month of death, whilst others felt strongly that liability should sit with the person most able to pay.
- The response to whether PSAs should be required to retain the details of beneficiaries for a certain period was mixed, and the suggestions on the length of this period ranged from five to 10 years.
- Many felt that the process and information-sharing requirements would lead to increased complexity, delays and poorer outcomes for beneficiaries.
Next steps
Draft legislation has been published to bring unused pension funds and death benefits into the scope of IHT from 6 April 2027, regardless of whether the pension scheme administrators or scheme trustees have discretion over the payment of any death benefits.
All death in service benefits payable from a registered pension scheme will nevertheless be excluded from the value of an individual’s estate for IHT purposes.
- Personal Representatives (PRs), not PSAs as originally announced, will be liable to report and pay any IHT due.
- Pension beneficiaries will become jointly and severally liable for IHT due on pensions.
- Pension schemes will be required to make the IHT position clear and explain to non-exempt beneficiaries that IHT may be due when informing them of their benefits, how they can access them, and options for paying.
- PRs will be required to notify PSAs of a death, and PSAs will be required to share the value of any unused pension funds or death benefits with the PR, within four weeks of receiving notification of the death.
- Legislation will be updated to provide the right framework to allow PSAs and PRs to exchange information for IHT and Income Tax purposes.
- Where both Income Tax and IHT are paid on the same pension benefits, mechanisms will be put in place to account for any overpayments and ensure that refunds are processed.
PRs and pension beneficiaries will have several options to pay the IHT due:
- Pay directly from the estate.
- Beneficiaries direct the PSAs to pay.
- Beneficiaries pay directly after receiving their pension benefits in full.
Existing IHT principles that provide an exemption for death benefits passing to a surviving spouse or civil partner, and registered charities, will be maintained.
Further guidance will be provided in due course to support PRs, PSAs and beneficiaries ahead of 6 April 2027.
Useful guides on this topic
At a glance: How to calculate Inheritance Tax
What is Inheritance Tax (IHT)? When is IHT charged? How do I calculate IHT on an individual's estate? What rate of IHT applies?
Pensions: What happens when you die?
What happens to your pension when you die? What tax is due by your estate? Will your family have to pay Income Tax if they receive your pension going forward? What can you do to mitigate any tax charges?
IHT: Estate planning checklist
This checklist covers some of the essential planning points that taxpayers should know when planning for their estate and Inheritance Tax (IHT).
External links
Consultation outcome: Inheritance Tax on pensions: liability, reporting and payment