Unused Pensions To Be Included In Inheritance Tax From 2027

We have been awaiting clarification since Chancellor Rachel Reeves first proposed the reform in her Autumn Statement in October 2024. At the time, the Chancellor described the changes as part of a broader effort to create “a fairer, less economically distortive tax treatment of inherited wealth and assets”. The announcement included proposals to bring unused pension funds and death benefits into scope for IHT.

Until now, pension savings have typically sat outside an individual’s estate for IHT purposes, giving many people the opportunity to leave behind more wealth for their loved ones by keeping their pension unspent.

What’s changing?

Following the consultation period, the Government has confirmed some elements of the original plan will not go ahead. Notably, death in service benefits paid from a registered pension scheme will remain exempt from IHT.

Two other exclusions were also confirmed. First, scheme pensions paid to a dependant from a defined benefit arrangement will not be caught by the new rules. Second, death benefits from a collective money purchase scheme will also be excluded. The Government also gave clarification that the ‘legal personal representatives’ of the deceased person will be responsible for declaring any pension benefits within the estate’s IHT return submitted to HMRC.

Impact on pension schemes and trustees 

The changes look certain to increase the administrative complexity for scheme administrators, particularly following a member’s death. Under the proposed information-sharing requirements: 

• Scheme administrators must provide the deceased member’s personal representatives with the value of in-scope funds as at the date of death
• This must be done within four weeks of notification of death and determination of beneficiaries
• Administrators must also identify the split between exempt and non-exempt beneficiaries
• HMRC is placing responsibility on the pensions industry to provide clear guidance to beneficiaries around IHT liabilities and payment options. 

Additional draft information-sharing regulations are expected, which will likely introduce further administrative processes for schemes. 

The reform will place new and significant reporting and compliance obligations on pension scheme administrators and trustees. The short timeframe for responding to personal representatives, especially when multiple beneficiaries are involved, will challenge existing processes, particularly for schemes with legacy systems or complex death benefit structures. 

Impact on IHT receipts and affected estates

The policy change is expected to significantly boost IHT receipts. HMRC reported that between April and June 2025, IHT receipts totalled £2.2bn, £100m more than the same period in 2024. By 2029/30, the reform is projected to raise an additional £1.5bn a year.

Estimates suggest the average IHT bill could rise by around £34,000 once the new rules take effect. However, those numbers could be higher, particularly if individuals who had assumed pensions would fall outside their estate fail to review their existing arrangements.

There is also the potential for ‘double taxation’. If someone dies at age 75 or over, their pension is already taxed as income when passed on. From 2027, it could also be hit by IHT. This ‘double layer’ of tax could mean more than half the pension is lost to tax, even for basic rate taxpayers. For higher earners or larger estates, the combined tax could be significantly more.

Reminder – how IHT works today

IHT is charged at 40% on the value of an estate above the available allowances. Currently, each individual has a standard nil-rate band of £325,000, with an additional £175,000 available under the residence nil-rate band if the family home is left to direct descendants. 

Although pensions are being brought into scope for IHT, the current rules around paying IHT aren’t changing. The person in charge of handling the deceased’s estate must calculate, report and pay any IHT due within six months of the end of the month in which the person died. From April 2025, interest on late payments has risen from 2.5% above the Bank of England Bank Rate (currently 4.25%) to 4% above Bank Rate, taking the late payment penalty to 8.25%.

The six-month deadline could prove challenging. From 2027, every estate that includes a pension will need to go through the process of checking whether IHT is due - not just wealthier estates - which could create bottlenecks. Pension providers and personal representatives will depend on each other to share information quickly, but delays are likely.  

Looking ahead

With the rules not taking effect until April 2027, scheme sponsors and trustees should use the intervening period to review processes, update communication materials and ensure that members are aware of the potential tax consequences for their beneficiaries.

Luke Carter, Regulatory Consultant at Equiniti said,