The HMRC consultation is set to significantly alter the rules regarding Inheritance Tax on pensions. To help you understand how this may affect you and your estate in the future, we have summarised these changes, along with the PASA response, in this article. 

Are pensions subject to Inheritance Tax?

Historically, pension pots have not counted as part of a taxable estate for Inheritance Tax purposes. However, this is set to change.

In last year’s Autumn Budget, it was announced that most unused pension funds and death benefits will be subject to Inheritance Tax from 6 April 2027. This measure will increase the value of many estates for Inheritance Tax purposes and could therefore impact whether a person’s estate is considered to fall within the relevant nil rate band thresholds (and be free of inheritance tax at a rate of 40%). The UK government estimates suggest that the changes will increase the Inheritance Tax payable by almost 50,000 estates in 2027/28.

An overview of the HMRC consultation on Inheritance Tax on pensions

Currently, most (discretionary) pension schemes are not taken into account for Inheritance Tax purposes, and where they are, the burden is on the deceased’s executors to report this to HMRC and pay from the estate the tax due. 

The HMRC consultation on Inheritance Tax on pensions proposed that, whilst executors would remain liable to report to HMRC the inheritance due on all non-pension assets held on death, the tax due on pension death benefits would be reported and paid by the relevant pension scheme administrator (PSA). This would rely on extensive cooperation between PSAs, executors and HMRC to ensure each party has all the information they need to calculate their tax liability.

PASA’s response

PASA’s response to the consultation is, in part, that the proposed measures are unnecessarily complex and place an unfair burden on PSAs, beneficiaries and executors. These individuals/groups will all be required to communicate with each other effectively within the deadline for the inheritance tax payment. PASA fear that information is unlikely to be shared promptly in every case, particularly where grief is involved. 

PASA has suggested alternatives to this approach, which are outlined in their consultation response. One possibility involves eliminating the use of discretionary pension death benefits, which would simplify the work of PSAs at the loss of flexibility from the perspective of pension savers.

Advice on estate planning

While it remains to be seen whether the new rules regarding Inheritance Tax on pensions for April 2027 will be altered in light of the PASA criticism, this matter demonstrates that estate planning and Inheritance Tax provisions can be complicated.

Seeking legal advice at the earliest stage ensures that you can plan as effectively as possible for any future Inheritance Tax liabilities your estate may be responsible for. At Kitson Boyce, our expert team of Private Client lawyers are on hand to provide you with this guidance. Based out of our three offices in Torquay, Plymouth and Exeter, our Private Client lawyers will help you plan for both now and the future. 

Whether you are concerned about how the government proposals on pensions might affect the tax treatment of your estate or have any broader questions in relation to estate planning and Inheritance Tax on pensions, please do contact us on 01803 202020 or email [email protected] and we can assist you.