The Government has published its response to its consultation on extending the scope of inheritance tax (“IHT”) to pension scheme death benefits and unspent pension pots, revising the operation and benefits caught by the tax. Relative to the initial consultation proposals, the revised proposals will be welcomed by pension scheme administrators (PSAs), as the Government has shifted the burden of settling IHT in relation to pension schemes from PSAs (in HMRC’s sense, ie usually the trustees or managers of a scheme not the day-to-day administrator) to the deceased’s personal representatives (“PRs”, ie executors and administrators of the member’s estate). Nevertheless, there will be some additional work for PSAs, over and above the current approach to death benefits, and the revised proposals appear unlikely to be welcomed by PRs as they will need to liaise with PSAs and the new process will make the PRs responsible for IHT on assets they don’t control.
On 21 July 2025, HMRC “Legislation Day”, the Exchequer Secretary, James Murray, made a statement on tax policy ahead of publication of the next Finance Bill. The Government published draft legislation to bring most unused pension funds and death benefits within the value of a person’s estate for IHT purposes in relation to deaths on or after 6 April 2027, alongside a policy paper.
The initial consultation, in October 2024, proposed that PSAs work with PRs to determine the IHT due on death benefits and then PSAs pay that IHT before settling benefits. The pension industry was strongly of the view this would create many difficulties and delays for beneficiaries as well as for the PSAs and PRs. In its July 2025 response to the consultation the Government, “in recognition of the overwhelming feedback” it had received, confirmed its revised approach: PRs would be liable for reporting and paying IHT on pension death benefits.
PSAs must inform PRs of the value of the death benefits for IHT purposes within four weeks of receiving notification of the member’s death. This will be the value of all relevant unused pension funds and pension death benefits in scope as at the date of death. Once the PSA has completed their processes to determine how the benefits should be distributed, they will tell the PR how the pension benefits will be split between exempt beneficiaries (such as most spouses and civil partners) and non-exempt beneficiaries. Only if the PR becomes aware that they will need to report to HMRC will PRs request further details from PSAs. PRs will inform the pension beneficiaries (if known) and the PSA of the amount of the IHT due on their component of the estate. There are then several ways that the IHT on the pension component of the estate can be paid.
PSAs will be required to explain to non-exempt beneficiaries that IHT may be due when informing them about their benefits and the options for paying the IHT. These include directing the PSA to pay their IHT liability under a “Pensions Inheritance Tax Payment Scheme (PITPS)”. Such payments will be authorised payments and will not be subject to Income Tax. PSAs would have to pay amounts over £4,000 within three weeks of a request to pay; amounts below £4,000 would be at their discretion. The maximum IHT payable under a PITPS is the amount of the relevant death benefit not yet paid to the beneficiary. IHT and Income Tax will not both be due on the same part of the benefit and beneficiaries will be able to reclaim overpaid Income Tax from HMRC.
Once the final death benefit has been settled, the PSA will confirm this to PRs alongside (as now) the information needed for the PRs to assess whether the lump sum and death benefit allowance has been exceeded.
As set out in the initial consultation, dependants’ scheme pensions continue to be exempt from IHT. The Government has now widened the exemption for death in service benefits paid from registered pension schemes – they will remain out of scope of IHT, regardless of whether they are discretionary or not (this latter point will be welcomed by beneficiaries of the NHS and other public sector non-discretionary schemes) provided that the lump sum “is not payable unless the member is an active member of the scheme” at the date of death. Commutation of trivial dependants’ scheme pensions will also be exempt. The response confirms that joint life annuities (which can be paid to children and unmarried partners) are not part of the member’s estate so will not be assessable against IHT on the member’s death.
While the revised proposals will be welcomed by many schemes, they will incur set-up and administration costs. The concerns of Professional PRs, in particular, about the incorporation of pension scheme death benefits into the IHT regime and their interaction with the wider estate are expected to remain. These include membership of pension schemes unknown to the PRs, the time needed for PSAs to gather information and make decisions, scheme beneficiaries spending money before paying their share of IHT, and the continuing six month deadline from date of death for PRs to settle IHT before late payment interest charges apply. HMRC promises to work with industry experts to refine and develop the process and provide further tools and guidance.
Consultation on draft legislation to implement these changes runs until 15 September 2025; we expect the Finance Bill 2025-26 to be published in the Autumn following the Budget. The Government will also publish draft legislation in due course on the changes to the regulations covering information sharing.
