HM Revenue & Customs has confirmed that from April 6, 2027, most unused pension funds and death benefits will be included in the value of a deceased person's estate for inheritance tax purposes. The change aims to prevent pensions being used to transfer wealth rather than for retirement income.
Under the new rules, personal representatives must take 'reasonable steps' to identify the deceased's pension savings, including reviewing records and bank accounts. However, law firm Irwin Mitchell warned that without definitive guidance on what constitutes 'reasonable steps', executors face uncertainty, delay, and increased personal exposure.
Currently, inheritance tax at 40% applies to estates above £325,000, with reliefs for spouses, charities, and other exemptions. After April 2027, pension benefits received by beneficiaries will first be liable for inheritance tax, with income tax then applied to the remainder. The tax-free allowance transfer between spouses remains, allowing couples to pass on up to £1 million tax-free.
Executors must provide identification to pension scheme administrators before receiving a grant of probate. They can instruct providers to withhold up to 50% of lump sum benefits for up to 15 months to cover potential inheritance tax. Death in service benefits, joint life annuities, and dependents' scheme pensions remain exempt.
