Implications of new inheritance tax and pensions proposals

The 30 October Labour Budget may have left many pensions untouched, but one significant change is now on the horizon.

HMRC has released a Technical Consultation, titled Inheritance Tax on Pensions: Liability, Reporting and Payment, which outlines plans to extend inheritance tax (IHT) to unused pension funds and death benefits starting 6 April 2027.

This move marks a shift from the post-2015 pension freedoms era, which allowed substantial pension funds to pass to beneficiaries without incurring IHT. The consultation signals a return to the principle that pension tax benefits should primarily support retirement funding, rather than enable tax-free wealth transfer across generations.

Key details of the proposed changes

The consultation primarily addresses the administrative processes involved. Responsibility for calculating and paying IHT on pension funds and death benefits will fall to Pension Scheme Administrators (PSAs). Meanwhile, Personal Representatives (PRs) of the deceased must work closely with PSAs to obtain pension valuations, calculate IHT, and ensure timely payment to HMRC.

Here’s how the process would work:

• PRs notify PSAs of the pension holder’s death.
• PSAs provide the value of pension assets within two months of the request.
• IHT must be paid to HMRC within six months of the death month; delays incur interest penalties.

Challenges ahead

The timeline for implementing these changes — April 2027 — may be tied to the full rollout of Pension Dashboards, expected by October 2026. While dashboards will streamline access to pension values for many schemes, complexities remain for SSASs and Full SIPPs holding assets like commercial property or unquoted shares. Valuations in these cases may involve external professionals, whose fees could rise due to the urgency of requests.

Additionally, many PRs will be close family members of the deceased — often grieving and unfamiliar with legal or financial processes. For FCA-regulated PSAs, balancing their obligations with the FCA’s Consumer Duty, particularly in dealing with vulnerable customers, adds another layer of complexity.

What comes next?

The consultation period provides a vital opportunity to address these challenges. Responses are open until 22 January 2025, and it’s crucial to highlight the practical difficulties these proposals could create for pension providers, beneficiaries, and PRs alike.

Raising IHT on pensions may align with government revenue goals, but the real-world implications for bereaved families and pension schemes must be carefully considered. If you’re concerned about the proposed changes, ensure your voice is heard in the consultation process.