HMRC has released new details on what is often called 'the most hated tax' — inheritance tax (IHT) — which will now target older people's retirement savings. From April 2027, the inheritance tax net will be cast much wider, dragging in most unused pension funds and death benefits.
Major Shift in Legislation
Historically, pensions have been shielded from IHT, allowing many retirees to use them as a tax-efficient way to pass wealth down to their families rather than purely funding their later years. The updated guidance reveals that personal representatives — the people managing an estate after someone dies — will be legally required to take 'reasonable steps' to track down all pension assets. Executors will need to dig through paperwork and online accounts to establish the value of the deceased's retirement pots.
Administrative Challenges
Legal experts warn this could create a severe administrative headache. Law firm Irwin Mitchell has highlighted the difficulty of piecing together fragmented records, tracking down forgotten workplace schemes, and securing digital passwords during a period of bereavement.
Current vs. New Rules
Currently, if a person dies after turning 75, beneficiaries usually inherit the pension free of IHT but must pay income tax on any withdrawals. The new framework coming in 2027 introduces a strict order to mitigate the impact of a double-tax hit:
- First: The pension value is added to the estate. If the total estate exceeds the tax-free threshold, a 40% inheritance tax is applied.
- Second: Beneficiaries will then only pay income tax on the money that remains after the IHT deduction.
Payment and Safety Net
While the standard six-month deadline to pay IHT remains — with interest accruing on late payments — HMRC is introducing a safety net to ensure the bill is covered. Executors will have the power to order pension providers to freeze up to 50% of any lump-sum payouts for up to 15 months. This ensures that the tax is settled before the money is distributed. Alternatively, families can instruct the pension company to pay the required tax directly to HMRC from the fund.
