In October 2024, the UK Government announced as part of the budget that from 6 April 2027, “inherited pensions [will be brought] into inheritance tax”. More detail was set out in a technical consultation paper issued by HMRC from which it appeared that almost all lump sum death benefits (including discretionary lump sum death benefits), as well as unused DC assets and dependants’ annuities could be brought within the ambit of inheritance tax (IHT), although there was a distinct lack of clarity about what was intended to be covered.   

The consultation paper also made it clear that the obligation to pay the new IHT liability would fall on scheme administrators (which for tax purposes are usually the trustees), with a requirement for a deceased member’s personal representatives to send the scheme administrator a statement providing the details needed to calculate the IHT due. Many commentators queried how workable these proposals would be, particularly given the proposed timeframes and pointed out that they could result in the unnecessary payment of IHT.   

A response to that consultation has now been issued, along with an HMRC policy paper and draft legislation.  They provide some welcome clarifications and changes to the original proposals.

Benefits in scope

IHT will be chargeable on monies payable from a scheme on a member’s death, including unused DC funds and death benefits.  However, there are exceptions.

All death in service benefits payable from registered pension schemes will be out of scope, regardless of whether they are payable on a discretionary or non-discretionary basis. Currently, the majority of such benefits are payable under discretionary trust to ensure they fall outside the member’s estate for IHT purposes but this will no longer be necessary. Schemes may therefore want to consider changing the distribution of death in service benefits to remove the element of discretionary distribution in some cases.

The exception explicitly only applies to death in service benefits as opposed to lump sums payable on death in retirement or deferment. Continued life cover is not uncommon for deferred members where they remain in employment following a closure to accrual. It is to be hoped that HMRC will treat such members as active members for these purposes and within the scope of the death in service exemption – further clarification on this point would be welcome.

Pensions payable to dependants and spouses directly from the scheme or from a separate joint life annuity are out of scope of the new requirements. It is not clear from the draft legislation what the position is in relation to any joint life annuity held by a scheme where the recipient is not themselves exempt from IHT (as spouses and civil partners are), although the consultation response suggests these should not be in scope.

It is also worth noting that the new provisions apply to payments from registered schemes and therefore death benefits from unregistered schemes will also be out of scope.

Liability for and payment of IHT

In a change from the initial proposals, a deceased member’s personal representatives will primarily be liable for reporting and paying IHT on unused pension funds and death benefits, although they can recover it from the relevant beneficiaries if necessary. However, there are other options for the payment of any IHT which a beneficiary can select: they can direct the scheme administrator to pay the IHT on their behalf if it is £4000 or more; or they can pay the IHT directly.

Scheme administrators will need to pay any IHT due from them within 3 weeks of receiving the notice from the beneficiary asking them to do so and informing them of the amount, otherwise they will become jointly liable for the IHT. If the amount of IHT they are asked to pay is less than £4000, they have a discretion whether to make the payment or not.

Information requirements

Scheme administrators will need to provide a member’s personal representatives with information about the “as at death” value of any in-scope unused pension funds or death benefits within 4 weeks of receiving notification of the member’s death and once it has been determined who the beneficiaries are, what the split between exempt and non-exempt beneficiaries is. HMRC want the pensions industry to provide clear guidance and support to beneficiaries in respect of any IHT that may be due on their benefits and what the options are for paying it. Further draft information sharing regulations are expected.

These proposals will add to the administrative burden on schemes when a member dies and will need to be built into administration processes.

This article was first published in the July 2025 edition of Slaughter and May's Pensions Essentials Bulletin.