HM Revenue & Customs has released details of new rules affecting retirees and pension savers, set to take effect from April 6, 2027. Under the changes, most unused pension funds and pension death benefits will be included in the value of a deceased person's estate for inheritance tax (IHT) purposes.
Key Changes from April 2027
HMRC confirmed that from next April, pension pots will be subject to IHT. Currently, a standard IHT rate of 40% applies on estates above a £325,000 threshold. For example, an estate worth £500,000 would incur 40% tax on £175,000. Under the present policy, no IHT is usually payable if the estate falls below £325,000 or if everything above that threshold is left to a spouse, civil partner, charity, or community amateur sports club.
Impact on Beneficiaries
If a person dies after age 75, inherited pension income is currently free of IHT, though income tax is levied on withdrawals. After April 2027, the pension amount a beneficiary receives will be liable for IHT first, and income tax will be paid on what remains. The unused tax-free allowance can still be added to a spouse or civil partner's allowance, meaning couples can leave up to £1 million to loved ones without paying IHT.
Administrative Responsibilities
HMRC expects personal representatives to take "reasonable steps" to identify a deceased person's savings, including reviewing records and bank accounts. However, without access to the Pensions Dashboard, identifying lost pension pots may be challenging. Law firm Irwin Mitchell warned that executors risk "uncertainty, delay and increased personal exposure" due to a lack of definitive guidance on what constitutes "reasonable steps." HMRC noted that representatives must look through "all the deceased's papers," but complications arise from needing passwords to access online records.
Payment and Reporting Deadlines
IHT due on pension pots must be paid by the end of the sixth month after the date of death, with late payment interest added at the Bank of England's base rate. Executors can instruct pension providers to withhold up to 50% of lump sum pension benefits that may incur IHT for up to 15 months, ensuring taxes are settled before payments are made. Personal representatives and beneficiaries can also ask pension providers to pay taxes directly to HMRC.
Identification Requirements
From April, personal representatives must share identification with pension scheme administrators before receiving a grant of probate or letters of administration. Evidence may include a copy of the deceased's Will naming the executor, a death certificate, and a signed declaration accepting the executor role. In cases without a Will, the required evidence differs, and rules vary in Scotland and Northern Ireland.
Exemptions
Death in service benefits remain exempt under the new rules, though they may need to be reported to HMRC. Joint life annuities, which guarantee regular income for two people, and dependents' scheme pensions are also exempt.
