From nest egg to tax target: Pension funds will no longer be exempt from IHT

The government’s original proposals aimed to address concerns that pensions were increasingly being used as strategic estate planning vehicles, rather than encouraging saving for retirement. However, the proposals raised confusion in the industry as it was not clear whether all death in service benefits would be brought into the scope of IHT, including those from discretionary and non-discretionary registered pensions.  Concerns were also raised as to how pension scheme administrators (PSAs) would be able to report and pay any IHT due on the unused pension component of a scheme’s member’s estate within six months of their death, given that there are often significant delays in notifying schemes of a death.

Clarification of IHT treatment of pensions

Following a technical consultation on the original proposals addressing some of the industry’s concerns, the government has now confirmed the following:

• Most undrawn pension funds and death benefits will be brought within the value of a person’s estate for IHT purposes from 6 April 2027, regardless of whether the pension scheme administrators or trustees have discretion over the payment of any death benefits.
• All death in service benefits payable from both discretionary and non-discretionary registered pensions schemes will be outside the scope of these changes and therefore will not be subject to IHT. It has been recognised that death in service benefits are an essential support for bereaved families.
• Charity lump sum death benefits will be excluded from IHT, together with dependants’ scheme pensions.
• Personal representatives (or “executors”) of the deceased will be liable for reporting and paying any IHT due on undrawn pension funds and death benefits, instead of the PSAs. This means that any IHT bill could be paid from other assets in the estate. Pension beneficiaries can give notice to the PSAs requiring the PSAs to pay the IHT attributable on the pensions scheme death benefits.
• If the PSA distributes the pension benefits in full and pays income tax on this amount (as would be the case where the member died on or after age 75), the beneficiary can within a certain period make a reclaim of the income tax paid insofar as this relates to the portion of the pension payment used to cover the IHT liability. Pensions beneficiaries will be able to reclaim any overpayments of income tax in situations where the IHT liability has not already been taken into account.
• Like the free estate, interest will be payable on unpaid IHT on the pension component, starting six months after the death of a deceased member.

How to plan accordingly

While some key IHT exemptions remain in place, the broader inclusion of pension savings in the IHT net may have implications for how individuals structure their affairs. We would not generally advise taking any substantial action before the final form of the legislation is confirmed; however, some practical next steps to start considering are as follows.

• Take stock of existing pension arrangements, including any death-in-service benefits or discretionary trusts set up to receive pension benefits, to understand how they may be affected by the new rules.
• Speak to your estate planning advisers to consider other IHT estate planning strategies to mitigate IHT on your overall estate; for example, gifting assets during your lifetime and using other IHT exemptions and reliefs. It is worth noting that the IHT rules have not changed in respect of IHT payable on pensions and death benefits paid to a surviving spouse or civil partner, as well as to registered charities: these payments are IHT exempt.
• Ensure pension nomination forms are up to date and reflect current wishes, particularly in light of the new reporting and tax responsibilities for personal representatives. If a spouse/ civil partner is not already named, consider adding them as a nominated beneficiary for IHT efficiency.
• Assess liquidity within the estate, especially where pension assets may give rise to IHT but are not readily accessible to cover the liability.
• Consider taking out life insurance to plan for the estate’s potential IHT bill.
• Stay up to date as the latest details, developments and guidance are released by the government. The technical consultation on the draft legislation closes on 15 September 2025, with amendments to the draft legislation to be published in due course.

How we can help

The Private Client and Pensions teams at Wedlake Bell work together to advise individuals on their pension, including the impact of upcoming IHT reforms affecting pension benefits. For further information or advice, please contact a member of our Private Client team or your usual Wedlake Bell adviser.

This article is for general information only and does not seek to give legal advice or to be an exhaustive statement of the law. Specific advice should always be sought for individual cases.

This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.

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   • Clare Armitage

   • Partner
   • Private Client

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   • Emily Minett

   • Senior Associate
   • Private Client

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