Pensions and Inheritance Tax: The rules are changing

For many years, pensions have enjoyed favourable treatment for Inheritance Tax (IHT) purposes, making them an important part of many people's wealth and succession planning arrangements.

That position is set to change. From 6 April 2027, most unused pension funds and death benefits will be taken into account when calculating the value of an estate for IHT purposes. For some families, this could result in a larger tax bill on death and may affect long established estate planning strategies.

Why does this matter?

Historically, pension savings have often sat outside an individual's estate, allowing other assets to be used during lifetime while pension wealth could be passed on relatively efficiently to future generations.

The new rules are expected to bring many pension funds into the IHT calculation alongside assets such as property, savings and investments. As a result, individuals who previously believed their estate was comfortably below the available IHT thresholds may wish to reconsider their overall position. 

For those with substantial pension savings, the changes may influence wider decisions around gifting, succession planning and how wealth is intended to pass between generations.

A more complex estate administration process

The reforms are likely to make estate administration more involved for executors and administrators.

As part of the process, personal representatives will need to obtain information from pension providers regarding the value of any relevant benefits and include those figures when reporting the estate to HMRC. Pension scheme administrators will generally be required to provide this information following a formal request. 

This introduces an additional step at a time when families are already dealing with what can often be a difficult and emotional period.

A practical solution for paying the tax

One of the concerns surrounding the new regime has been how any tax attributable to pension benefits would be paid, particularly where the beneficiaries of the pension are different from those inheriting the rest of the estate.

To address this, a new procedure will allow personal representatives to request that pension administrators pay the relevant IHT directly to HMRC from the pension fund itself before benefits are distributed. Beneficiaries may also be able to utilise this process in certain circumstances. 

This should ease potential cashflow pressures on estates and help avoid situations where executors are required to fund the tax liability from other estate assets while awaiting reimbursement from beneficiaries. 

Planning ahead

Although the changes are not due to take effect until April 2027, they serve as a timely reminder that estate planning should be reviewed regularly.

In particular, it may be sensible to consider:

• Whether your current Will remains appropriate;
• The value of your pension benefits in the context of your wider estate;
• Whether your pension death benefit nominations reflect your wishes;
• Opportunities to make lifetime gifts; and
• The role trusts or other planning arrangements may play in meeting your family's long-term objectives.

No two estates are the same, and the impact of these changes will vary considerably depending on individual circumstances.

How we can help

The forthcoming changes represent one of the most significant developments in estate planning in recent years. Taking advice now can help you understand your potential exposure and consider whether any steps should be taken before the new rules come into force.

If you would like to discuss your estate planning arrangements, review your Will or understand how these changes may affect you and your family, please get in touch.