Eleanor Evans TEP, Partner and Head of Trusts and Estates Administration, summarises HM Revenue and Customs’ 21 July 2025 policy paper and draft legislation covering the changes to pensions and inheritance tax. She explains the key takeaways and practical impacts arising from the new details that have been provided ahead of the changes being implemented in April 2027.
HM Revenue and Customs published a policy paper and draft Finance Bill legislation on 21 July 2025, with further detail on the plans to bring unused pension funds and death benefits into deceased persons’ estates for inheritance tax (IHT) purposes. These measures were initially announced in the Autumn 2024 budget.
Key takeaways:
- From 6 April 2027, most unused pension funds and lump sum death benefits will form part of a deceased person’s estate for IHT.
- The reform is intended to change the approach often used under the current rules where affluent individuals use pensions as an IHT planning mechanism to pass on wealth free of tax, rather than the pension being used to fund retirement.
- Transfers of unused pension funds and lump sum death benefits to a surviving spouse or civil partner, or to charities, will remain exempt from IHT. Transfers to other beneficiaries will be subject to IHT at 40% on amounts above the IHT nil-rate band (currently £325,000 per person), which will be shared between the pension fund, the estate in the deceased individual’s sole name, and any trust assets in which the individual had a life interest.
- Death-in-service lump sum benefits and dependants’ pensions from defined benefit pension schemes will be excluded from the new rules.
- Responsibility for valuing, reporting and paying IHT on relevant pension assets will rest with personal representatives of estates. Pension scheme administrators will not be required to report or account for IHT (as had originally been envisaged) but there will be a scheme by which IHT can be paid directly by pension scheme administrators to HM Revenue and Customs on the request of the beneficiaries.
- The deadline to pay IHT at the end of the sixth month after the month of death will not change.
- Where pension assets are inherited after the pension holder’s 75th birthday, beneficiaries may be subject to both IHT and income tax, resulting in a potential tax burden of up to 67% of the fund being paid in tax.
- An estimated 10,500 estates will become newly liable to IHT under these changes, with approximately 38,500 estates expected to pay more IHT, on average by up to £34,000 per affected estate.
- The reforms are projected to raise in the region of £1.5 billion per year by 2029 to 2030.
Conclusions
The policy paper and draft Finance Bill legislation provide some clarity on how the new rules are likely to work in practice.
The additional responsibility for personal representatives to report and pay IHT on pension monies which are not within the estate is likely to add complexity, cost, and time to the estate administration process. This could impact on timeframes within which beneficiaries, including charities, will receive their legacies. Personal representatives will need to ensure they take prompt advice regarding the administration of estates and their obligations, particularly in view of the six-month deadline to pay IHT.
Individuals whose estates will be brought into the IHT regime as a result of the reforms may wish to review their pension arrangements and consider taking estate planning advice to mitigate the impact of the changes.
