Starting 6 April 2027, unused pension savings will fall within the scope of Inheritance Tax (IHT), though employer-provided death-in-service benefits will remain exempt for now.
This change means that assets held in registered pensions, qualifying non-UK pension arrangements, and section 615(3) schemes will now be factored into the valuation of a deceased individual’s estate for IHT purposes.
Despite the added complexity of this updated system, IHT payments will still be required within the usual six-month timeframe following a death.
At present, HMRC lacks the necessary infrastructure to support this reform and will need to build a new system. The government has acknowledged that this development will place a substantial burden on its operational resources.
According to Rachel Vahey, AJ Bell’s head of public policy, “HMRC missed a chance to abandon the original proposals and is pressing forward with a system likely to cause additional complexity, confusion, and financial strain for grieving families. While most savers may not need to revise their financial plans, some could face tough decisions on reorganizing their affairs. The requirement to pay IHT within six months will be especially burdensome in cases where financial arrangements are complicated.”
Financial Impact and Policy Rationale
From the 2028–29 tax year, this measure is expected to generate £1.34 billion annually—more than twice the £640 million forecasted for its first year. Close to 40,000 estates are projected to incur higher tax liabilities, with the average increase estimated at £34,000.
Chancellor Rachel Reeves introduced this reform during the Autumn Budget 2024, framing it as a way to curb the use of pensions as a tax-efficient method of transferring wealth rather than their intended role in retirement planning. The Treasury stated the purpose of the policy is to “stop pension schemes being promoted as tax avoidance tools rather than retirement savings vehicles.”
Accompanying the policy, draft legislation and explanatory guidance have now been issued under section 150A of the Inheritance Tax Act 1984, with public feedback open until 15 September.
Practical Implications for Estates and Beneficiaries
The rule change will affect beneficiaries receiving unused pension savings as part of taxable estates, as well as executors, advisors, and pension scheme administrators. However, legal responsibility for IHT reporting and payments will rest with the estate’s personal representatives—not the pension providers—a reversal from earlier government plans that were scrapped due to opposition during consultation.
Additionally, inherited pension assets may still be subject to income tax depending on the deceased’s age and the form of benefits received. For deaths occurring before age 75, most lump sum and inherited drawdown benefits are exempt from income tax. After age 75, they are typically taxed at the beneficiary’s marginal income tax rate.
In situations where the beneficiary asks the pension scheme administrator to pay the IHT, those payments will be classified as authorised and exempt from income tax. If not, and the beneficiary pays IHT separately, they might be liable for income tax on the benefits and would then need to request a refund from HMRC.
HMRC has committed to building the infrastructure required for this system and will issue more detailed guidance in due course. However, it remains unclear how much the changes will cost to implement, especially since IHT processes are not currently digitised.
Existing IHT exemptions for benefits passed to spouses, civil partners, and charities will remain unchanged under the new rules.
