HMRC has published draft legislation which, if approved, will significantly change how pension death benefits are treated for Inheritance Tax (IHT) purposes from April 2027.

Will I have to pay IHT on my pension?

From April 2027, pension assets will generally be included in the estate for IHT calculation.

Responsibility for paying the IHT rests with the executors, but beneficiaries can request the scheme administrator to pay their share of the tax directly from the pension.

• If the IHT bill is £4,000 or more, the scheme must do this if requested.
• For smaller amounts, it is optional.

Exceptions – Certain pension death benefits will not be included for IHT purposes, such as:

• Death-in-service lump sums (where the member was still in pensionable employment)
• Dependants’ scheme pensions (e.g., spouse’s or child’s pension from a defined benefit scheme)
• Benefits paid to spouses/civil partners or charities will be IHT-free, just like any other asset.

These carve-outs mean some benefits will remain outside the IHT net, depending on scheme type and personal circumstances.

Will I face double taxation?

The draft rules address this directly.

If Income Tax is paid on a benefit that has already suffered IHT, a new mechanism (s.567B ITEPA 2003) allows the IHT amount to be deducted from taxable pension income.

What about Income Tax rules?

The existing age 75 rule remains unchanged:

• Death before 75 – Most lump sum or income benefits from a defined contribution pension are tax-free to the beneficiary (if designated within 2 years).
• Death at or after 75 – Benefits are taxable at the beneficiary’s marginal rate via PAYE.

Note: After 75, both IHT and Income Tax may apply. The new deduction rule prevents full double taxation, but not the combined effect of the two taxes.

Planning considerations

1. Marital status matters – Pensions passing to a spouse or civil partner are generally free from IHT. This exemption does not apply to unmarried couples.
2. Scheme flexibility – Not all pension schemes offer beneficiary drawdown. Without it, beneficiaries may be forced into lump sums, limiting tax-planning options.
3. Cross-border issues – If you or your beneficiaries live outside the UK, local tax treatment may differ and need careful coordination.
4. Nomination reviews – Ensure your expression of wishes is up-to-date and consistent with your estate plan.

Are pensions still worth saving into?

Pensions continue to offer:

• Tax-relieved contributions
• Tax-free growth
• 25% tax-free lump sum (within limits)
• Potential separation of business and personal assets

When will this happen?

These rules are currently in draft form and subject to Parliamentary approval. If enacted, they will apply to deaths on or after 6 April 2027.

Important Notice

Money Wise UK is not authorised or regulated by the Financial Conduct Authority (FCA) and does not provide regulated financial advice. The information above is for general guidance only and should not be relied upon as personal financial or tax advice. We strongly recommend that you seek advice from a suitably qualified and regulated independent financial adviser (IFA) before making any decisions. Tax rules can change, and their impact will depend on your individual circumstances.