HMRC has shared new details regarding the 'most hated' tax — inheritance tax — which will significantly impact pensioners. The timeline for implementation has been set out, though further specifics are yet to be announced.
Key Changes from April 2027
From April 6, 2027, most unused pension funds and pension death benefits will be included within the value of a deceased person's estate for inheritance tax purposes. Currently, pension funds are not considered for this tax, making them a tax-efficient way to transfer wealth rather than funding retirement, according to the government.
Full details of the change have not yet been announced, but HMRC has provided a technical note and a timeline for implementation.
How Inheritance Tax Works
When an estate is valued above a certain threshold at death, inheritance tax of 40% applies. Currently, if a person dies over age 75, inherited pension income is usually free of inheritance tax, but withdrawals are subject to income tax. After the April 2027 changes, the pension amount received by the beneficiary will be liable for inheritance tax first, with income tax only applied to the remaining amount to avoid a double tax hit.
Responsibilities of Estate Settlers
People appointed to settle a deceased person's affairs will be responsible for taking 'reasonable steps' to identify pension savings, calculate their value, and pay tax on them. This includes reviewing the deceased's records and bank accounts. HMRC says representatives may also need to contact pension companies and insurance schemes to notify them of the death and request information.
Implementation Timeline
HMRC has published an indicative timetable for next steps:
- Spring/Summer 2026: Make and lay regulations on information sharing requirements, with a commencement date of April 6, 2027.
- Spring/Summer/Autumn 2026: Continue to process design and develop guidance and other support tools.
- Autumn/Winter 2026/2027: Share draft guidance with industry stakeholders.
- Winter/Spring 2026/2027: Communicate activity to publicise upcoming changes to impacted groups.
- Spring 2027: Publish guidance and other supporting materials.
Inheritance tax remains one of the most unpopular taxes in the UK, and these changes aim to close a loophole that allowed pension funds to be used for wealth transfer rather than retirement income.
