Justin McGilloway
- Partner
- Pensions & Employee Benefits
Inheritance Tax on Pension death benefits – understanding the new IHT regime
The Finance Act 2026 (FA 2026) ushers in a significant shift to the inheritance tax treatment of pension death benefits, with major implications for personal representatives, scheme trustees and beneficiaries alike. From 6 April 2027, unused pension pots and death benefits that would previously have fallen outside the IHT net will, in most cases, become chargeable – regardless of whether trustees retain discretion over beneficiary selection.
Big picture
Prior to 6 April 2027, the unused pension pots and death benefits of registered pension scheme members usually escape IHT where the scheme trustees have discretion over choice of the pension beneficiaries.
The bad news is that, even where discretion remains in future, for deaths on or after 6 April 2027 IHT will generally be payable on such funds.
The upheaval and tax cost of this change should not be under- estimated. The deceased member’s personal representatives (“PRs”), the scheme trustees and the scheme’s pension beneficiaries will need to work together regarding each of the deceased member’s relevant pension schemes. Where a member has, say, 3 different registered pension schemes, the member’s PRs may find themselves having to liaise with 3 different sets of scheme trustees and potentially with many different beneficiaries.
How is all this to work?
Answer:
(1) FA 2026 sets the liability pecking order: PRs are primarily liable for the IHT and can serve a notice on the pension trustees to withhold distribution of up to 50% of the relevant scheme benefits. The PRs can also serve the scheme trustees with a notice to pay the part of the IHT attributable to the value of the scheme’s relevant benefits. Likewise, scheme beneficiaries can send the scheme trustees a notice to pay; and
(2) Regulations are going to be made specifying the information flow – content and timing – required between the PRs, the scheme trustees and the pension beneficiaries. These Regulations are likely first to be issued for Technical Consultation in the next few months. They are unlikely to be finalised and made much before this Autumn. HMRC will also be revising their Inheritance Tax Manual. None of this leaves much time before 6 April 2027.
IHT calculation issues
IHT calculation is primarily the PRs’ duty, but there are also issues for the scheme trustees and the scheme members. For instance:
- PRs must apportion the deceased member’s IHT Nil Rate between the deceased member’s own estate and his pension benefits in relevant schemes within the scope of IHT, to calculate how much IHT relates to the member’s estate and how much to the member’s in-scope benefits under each pension scheme;
- Scheme trustees will be obliged to inform the PRs about the in-scope benefits for IHT; for instance, it is now clear that death benefits arising in course of a member’s employment or work are out of scope;
- Pension death benefits passing, for instance, to the deceased’s qualifying spouse or registered civil partner will be out of scope. Scheme trustees’ decisions over distribution as between a spouse and other beneficiaries thus becomes more complex. Not only is there a need to weigh up family circumstances including considering any letter of wishes left by the deceased member, but the IHT impact of choosing beneficiaries now becomes a relevant factor for scheme trustees where there is eg a spouse. Sometimes pension scheme trustees need extra time to identify, verify and choose beneficiaries – time is not on their side given the IHT interest charge on unpaid IHT;
- No IHT agricultural or business property relief is available on property held within the scheme as HMRC is not permitted by the legislation to look through to these assets;
- Illiquid assets in the scheme may cause problems both of valuation and in raising funds to pay IHT; and
- Potential PRs can also serve notices. It is not entirely clear who such persons are.
Conclusion
Lots of potential pitfalls in FA 2026 for PRs, scheme trustees (and their scheme administrators) and scheme members. Our Pensions and Private Client Teams can provide advice on the changes.
(For our previous articles on IHT and Pensions, click here for or December 2024 article, here for our October 2025 article and here for our February 2026 article)
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.
Meet the team:
Clive Weber
- Consultant
- Pensions & Employee Benefits
