29th July 2025

Executors Beware! A Pensions and Inheritance Tax Update

We have just had the government’s response to the October 2024 consultation process, arising out of the changes to the Inheritance Tax (“IHT”) status of pensions announced in the Autumn Statement.

The consultation process triggered strong opposition from the pension industry, and this has resulted in some changes – although not the rollback of the fundamental idea of bringing pension values into the IHT calculations on death.

However, one of the changes is welcomed – lump sum multiples of salary death in service benefits are now firmly out of the scope of IHT. This is reassuring for any families who find themselves in the position of losing the main ‘bread winner’ who was in employment and had death in service benefits. This means that nominations in favour of persons other than the surviving spouse will still be useful, and indeed viable for the purpose of pushing value down and away from the surviving spouse onto members of the family who are not exempt from tax.

A less welcome change was the change in collecting of IHT on other pension benefits. Previously, the proposal had been that this responsibility would sit with the administrators of each pension scheme that the deceased had a pension with. However, that responsibility is now to be passed over to those named in the deceased’s Will as Executors, or if the deceased died without a Will, to those entitled to act as administrator under the Intestacy provisions.

 

For deaths occurring on or after 6th April 2027, the following apply:

  • Unspent defined contribution pension pots will be included in the deceased’s estate for IHT purposes, as will most death benefits payable from trusts registered with HMRC.
  • Almost all lump sum death benefits paid from either defined benefits or defined contributions pension schemes are within the scope of IHT payment. Only death in service lump sums are excluded.
  • Dependants’ scheme pensions (pensions paid to a survivor usually from a defined benefit arrangement) and the survivor element of joint life annuities (both for future and existing purchases) are outside the scope of IHT. This is new.
  • As was originally foreshadowed in the announcement in the Autumn Statement, all pension benefits in the scope of charge to IHT will be considered alongside other assets in the individual’s estate for IHT purposes; with the tax due depending on the aggregated size of the pension, and other estate assets. The usual IHT rules, including Nil Rate Band Allowance thresholds and exemptions for transfers of assets on the death to a spouse or civil partner, continue to apply.

 

Personal Representatives

The personal representatives for the deceased will be responsible for contacting pension scheme providers as well as calculating, reporting and ensuring that any IHT due is paid, working with the beneficiaries. This is an increased degree of difficulty for personal representatives than before. An increase in difficulty makes it even more important for personal representatives to seek professional advice from lawyers who are well-versed in dealing with HM Revenue & Customs, the payment of IHT and probate generally.

It’s particularly important considering if the IHT is not paid within six months of the end of the month in which death occurs, late payment interest charges will begin to accrue. The current rate of interest is 8.25% as at the date this article is written, although it can and does change. The use of professionals in this area will mitigate the risk of paying that interest on top of tax.

Marshalling the tax which is due will become much more complex for estates where death occurs after 6th April 2027. Tax may need to be procured by a release of some of the pension assets directly from the relevant pension schemes to HMRC on top of the existing funding mechanisms, being direct payment for non-instalment IHT and, if one is close to the sixth month deadline, payment of the first 10th of the instalment option IHT.

For more information as to how we can help you please contact our Edward Walter at ewalter@bussmurton.co.uk or call 01892 502 320.

Edward Walter

Edward Walter
Partner