The response confirms two significant changes to the previously proposed policy. Firstly, death in service benefits are now to be excluded from the proposed changes (alongside dependants' scheme pensions, which were already excluded). Secondly, personal representatives will be liable for reporting and paying any IHT due on unused pension funds and death benefits, rather than pension scheme trustees. However, schemes will need to establish additional processes for dealing with the remaining benefits of a deceased member whose estate falls under IHT.
Background
While there had been speculation ahead of the 2024 Autumn Budget about changes to the taxation of pension funds on death, Chancellor Rachel Reeves went further than many people expected.
The government proposed that, unused pension funds and most death benefits would be included within the value of a person's estate for IHT purposes from 6 April 2027. Only a limited number of death benefits would be excluded from this measure, with dependants' scheme pensions (mostly paid from defined benefit pension schemes) being the main exception. The existing overriding IHT exemption for transfers between spouses and civil partners on death would also continue to apply.
The main reason given for bringing pensions into the IHT regime was that the introduction of pensions freedoms in 2015 had led some to use pension schemes as tax planning tools to shelter wealth from IHT, rather than the intended purpose of funding retirement. This had been exacerbated by the abolition of the lifetime allowance in March 2023.
A technical consultation on very detailed and onerous proposed reporting and payment requirements ran from 30 October 2024 until 22 January 2025.
Outcome of the technical consultation
The technical consultation proposed that pension scheme trustees (whom HMRC terms the "pension scheme administrator" or PSA for this purpose) would become liable for reporting and paying any IHT, rather than the individual's personal representative (PR).
Significant concerns were raised by the pensions industry, primarily that PSAs would not know whether the deceased's estate would be large enough for IHT to apply. Much exchange of information between PSAs and PRs would be needed within an unrealistic six-month timescale, causing delays in payment to beneficiaries regardless of whether any IHT was due.
Although HMRC acknowledges that "some of these issues were known at the time of announcement" it now confirms that "the scale of the impact on [pension scheme administrators] and pensions beneficiaries became fully apparent during the consultation process." HMRC has confirmed that PRs will be liable for reporting and paying IHT, although there will be an option for the beneficiary to require the pension scheme to pay the IHT directly in some circumstances. Draft legislation to be included in the Finance Bill 2025-26 has been published. This Bill is likely to be passed in 2026.
Additionally, changes will need to be made to HMRC's information sharing regulations and HMRC plans to consult on these in due course. These changes are required to cover the additional requirements for information to be shared between PRs, PSAs and beneficiaries.
HMRC plans to work with industry experts to "develop and refine" the processes that will be required and will also "publish further tools and guidance to support" those concerned ahead of implementation in April 2027. Tools include a calculator to advise PRs whether IHT is due.
Comment
Whilst the removal of death in service benefits is welcome, the broad policy intention of including some pension savings within IHT is unchanged, and some will see an increased tax bill in the future.
Pension scheme trustees and administrators will welcome the lessening of the burden which was due to be placed on them. There will still be new requirements to navigate, and not all of the detail is available. With less than two years before the changes are due to come into effect, time is running out to provide the remaining detail.
Pension schemes will have to decide how (and when) to communicate with members before April 2027. Some high-net-worth members may choose to make changes to their pension arrangements and IHT planning, but schemes will have to be careful not to panic members in general into decisions against their interests because of a tax that will not apply to them.
