HMRC confirms major inheritance tax shake-up for pensions

HM Revenue and Customs (HMRC) has published fresh guidance outlining sweeping changes to how inheritance tax will apply to pension savings from April 6, 2027.

Under the new rules, most unused pension pots and death benefits will be included within estate valuations for inheritance tax purposes.

It marks a major shift from the current system, which largely excludes pension wealth from such calculations.

Labour said pensions have increasingly been used as a tax-efficient method of passing on wealth rather than solely providing retirement income.

HMRC’s technical note sets out the first details of how the changes are expected to operate, although fuller guidance and supporting regulations are still due to be published.

Industry specialists are continuing discussions with the tax authority to finalise the precise framework, with further clarification expected later this year or in early 2027.

Those responsible for administering a deceased person’s estate will be required to take what HMRC described as "reasonable steps" to identify pension savings, establish their value and ensure any inheritance tax owed is paid correctly.

This is expected to involve reviewing financial paperwork and bank statements while also contacting pension providers and insurance schemes directly where necessary.

However, the technical note did not clearly define what would constitute "reasonable steps", prompting concern among legal professionals and estate advisers.

Irwin Mitchell Solicitors warned the process could create additional stress for bereaved families already attempting to navigate complex financial arrangements.

The law firm said relatives often face difficulties locating complete pension records because of "fragmented records, historic workplace schemes and multiple providers".

Irwin Mitchell also questioned how executors would manage increasing levels of digital paperwork and account access.

The firm said: "The manual refers to 'looking through all the deceased's papers', but what about online records, and the passwords needed to access them?"

HMRC confirmed that the standard six-month deadline for paying inheritance tax after a death will also apply to pension funds brought into scope under the new regime.

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Interest will continue to accrue on unpaid tax liabilities at the Bank of England’s base rate if the deadline is missed.

A new withholding arrangement has also been introduced to help executors manage potential tax bills linked to pension benefits.

Under the proposals, executors will be able to instruct pension providers to retain up to 50 per cent of lump sum pension payments that may become liable for inheritance tax for a period of up to 15 months.

The measure is intended to prevent pension benefits being distributed before outstanding inheritance tax liabilities have been settled.

Personal representatives and beneficiaries will also be permitted to ask pension providers to transfer inheritance tax payments directly to HMRC on their behalf.

HMRC confirmed inheritance tax will apply before any income tax is charged on inherited pension funds, meaning beneficiaries will only pay income tax on the remaining balance and avoiding double taxation.

Married couples and civil partners will continue to receive important inheritance tax protections under the revised framework.

Any unused tax-free allowance from one spouse or civil partner may still be transferred to the surviving partner following death.

This means couples will continue to be able to pass on estates worth up to £1million without paying inheritance tax, subject to existing allowances and thresholds.

HMRC also confirmed most death in service benefits will remain outside the scope of the incoming pension inheritance tax changes.

Pension scheme administrators may still be required to report those payments to the tax authority under separate information-sharing requirements.

Joint life annuities and dependents’ scheme pensions will also remain exempt from the new inheritance tax rules.

The implementation timetable currently includes draft regulations covering information-sharing requirements this spring, with final guidance and supporting materials expected to be published in spring 2027.