The government has now responded to the many submissions made in reaction to last October’s consultation on extending inheritance tax (IHT) to pension death benefits.
In the Autumn 2024 Budget, the Chancellor announced two major IHT reforms. The first, set to take effect in April 2026, will reduce business and agricultural reliefs, a move that drew significant media attention (remember the tractors on Whitehall?). The second, which received less coverage but could have a greater long-term impact, involves bringing pension death benefits into the scope of IHT from April 2027.
As Parliament closed for summer, the Treasury released its summary of the 649 written responses to the consultation, along with draft legislation. Here are the key outcomes:
What’s Exempt
- Death-in-service benefits – typically lump sums based on salary, will be exempt from IHT. This means some benefits currently taxed will no longer be from April 2027.
What’s Still Taxable
- For all other pension death benefits, the proposal to apply IHT remains in place. However, the government has revised how the tax will be administered.
Originally, pension scheme administrators were to report and pay any IHT due. The industry pushed back, arguing this would unnecessarily involve all pensions in the IHT process, even though most cases wouldn’t owe any tax.
In response, the government has shifted responsibility to the deceased’s personal representatives, who already manage the rest of the estate. They will now be responsible for reporting and initially paying IHT on pension death benefits.
To help manage this, the government has outlined three options for how IHT can be settled:
- Pay from the estate -The personal representatives use estate funds to cover the tax.
- Request payment from the pension scheme – Beneficiaries ask the scheme administrators to pay the IHT.
- Pay personally -Beneficiaries receive the full pension benefit and settle the IHT themselves.
If your beneficiaries could be affected by these changes, it’s wise to start planning now.
Tax treatment depends on individual circumstances and may change. The Financial Conduct Authority does not regulate tax or will advice.
19th September 2025
