Inheritance tax on pension death benefits from April 2027

What are the current rules?

Pension death benefits are not generally included in the value of the individual’s estate for inheritance tax purposes because of the way their pension scheme is set up.

Pension schemes written under a trust or deed poll, and where the pension scheme administrator or the scheme trustees have discretion over who the death benefits are paid to, are not usually included in the value of the individual’s estate for inheritance tax purposes. 

However, non-discretionary death benefits – those where an individual has provided direction on who should receive the death benefits or pension schemes not written under trust or deed poll – are included in the value of the individual’s estate for inheritance tax purposes.

What’s changing?

The government is concerned that pensions are not being used for their intended purpose; to encourage saving for retirement and later life. Instead, they’re being used, and marketed, as an intergenerational wealth transfer tool allowing benefits to be passed to beneficiaries without an inheritance tax charge.

On 30 October 2024 HMRC published a technical consultation with their initial proposals, then on 21 July 2025 a Consultation Outcome, a Policy Paper, draft legislation and explanatory notes were published.

• From 6 April 2027 most unused pension funds and death benefits will be included within the value of a person’s estate for inheritance tax purposes. This is regardless of whether the pension scheme administrators or scheme trustees have discretion over the payment of any death benefits. Death in service benefits payable from both discretionary and non-discretionary registered pensions schemes and joint life annuities will not be included.
• Personal representatives will be liable for reporting and paying any inheritance tax due on unused pension funds and death benefits. Pension scheme administrators will have new duties to support personal representatives in paying inheritance tax, including the new Pension Inheritance Tax Payments Scheme.
• To mitigate the liquidity challenges, personal representatives and pension beneficiaries will have options on paying inheritance tax due on unused pension funds and death benefits.
• Pension scheme administrators will have to set up and run internal IT systems to offer the Pensions Inheritance Tax Payment Scheme. There will also be new obligations to communicate the potential tax consequences of decisions.
• The existing exemption from inheritance tax for pension death benefits passing to a surviving spouse or civil partner, and registered charities will be maintained.

What pension death benefits are in scope?

What pension death benefits aren’t in scope?

What will the new process be for reporting and paying inheritance tax on unused pension benefits?

HMRC has created the following high-level process for reporting and paying inheritance tax on unused pension funds and death benefits. They recognise that some of the stages will overlap, and it does not capture all customer journeys. HMRC will work with industry experts to develop and refine these processes and will publish further tools and guidance to support all those involved ahead of implementation in April 2027.

Stage 1 - Information exchange to establish the value of any pension benefits to be included in the estate

• Personal representatives must identify what pension benefits the deceased individual had and notify the relevant pension scheme administrators of their death, including whether there is a surviving spouse or civil partner.
• Once notified, the pension scheme administrator begins their processes to determine benefit distribution. If the scheme is discretionary, trustees start their discretionary decision-making process.
• Pension scheme administrators must inform personal representatives of the pension benefit value within 4 weeks of the death notification. This value includes all relevant unused pension funds and death benefits as of the date of death.
• Once the pension scheme administrator’s processes are complete, personal representatives are told how the pension benefits will be split between exempt beneficiaries such as spouses and civil partners and non-exempt beneficiaries.

Stage 2 - personal representatives value the estate

• The personal representative gathers information from each pension scheme administrator and other parts of the estate to determine the estate's total value and whether an inheritance tax account must be submitted to HMRC.
• If an account is required, the personal representative will notify the pension scheme administrators, provide the inheritance tax reference number, and request necessary identity details about the pension beneficiaries.
• The information requested from the pension scheme administrators will be limited to what is needed to complete the inheritance tax account.

Stage 3 - personal representatives file inheritance tax account and pay inheritance tax (if needed)

• If no inheritance tax account is needed, personal representatives can tell pension beneficiaries and pension scheme administrators that no inheritance tax is due, and generally no further action is required regarding the pension part of the estate.
• Personal representatives may proceed to apply for probate and distribute estate assets once no further action is required for pension benefits.
• Pension scheme administrators will complete their processes to determine beneficiaries and distribute pension benefits.
• If an inheritance tax account is required but no tax is due, personal representatives must submit the account to HMRC, then proceed with probate and asset distribution.
• If inheritance tax is due, personal representatives will determine the tax amount attributable to pensions benefits and submit an account to HMRC.
• Personal representatives will inform pension beneficiaries, if known, and the pension scheme administrator of the inheritance tax owed on their share of the estate.

There are several ways to pay the inheritance tax on pension benefits, these are set out in the How can inheritance tax due on pension funds be paid? section below.

Stage 4 - Distribution of pension benefits (pension scheme administrators and beneficiaries)

• Once notified of a death, the pension scheme administrator and trustees start identifying pension beneficiaries and arranging benefit payments.
• The pension scheme administrator informs beneficiaries of the amounts inherited and available options for receiving the benefits.
• Exempt beneficiaries, such as spouses and civil partners, can receive benefits without delay.
• Non-exempt beneficiaries are informed about potential inheritance tax due on their pension benefits and their joint liability for this tax with the personal representative. Beneficiaries have options to pay inheritance tax on their pension shares.
• Inherited pension wealth may also be subject to income tax, depending on the deceased individual’s age and the type of benefit:
  • If the deceased individual died before age 75, death benefits are generally free of income tax.
  • If the deceased died at or after age 75, benefits are taxed at the recipient’s marginal income tax rate.
• If a beneficiary requests the pension scheme administrator to pay inheritance tax liability, these payments will be authorised payments and will not be subject to Income Tax.
• If the pension scheme administrator does not pay the inheritance tax on behalf of the beneficiary, the beneficiary may pay income tax on the benefits received and may need to contact HMRC for a refund.

Stage 5 - Amendments

• Personal representatives manage amendments to the estate and submit updated inheritance tax accounts to HMRC.
• If more inheritance tax is due after an amendment:
  • Personal representatives will notify pension beneficiaries, or the pension scheme administrator if beneficiaries are unknown, of the increase.
  • Additional inheritance tax can be paid using the previously outlined methods.
• If less inheritance tax is owed, the personal representatives’ actions depend on whether probate has been granted.
  • Inheritance tax refunds are generally issued only after the deceased individual’s account is settled.
  • Personal representatives are responsible for distributing any refunds to the correct beneficiaries.
• Pension beneficiaries must contact HMRC directly if amendments require adjustments to income tax on their inherited pension funds.

How can inheritance tax due on pension funds be paid?

• The inheritance tax can be paid from the free estate.
  • Inheritance tax may be settled using funds from the free estate. Personal representatives can pay the inheritance tax owed on the whole estate, including any pension component, directly from these funds before applying for probate.
  • If the same individuals are beneficiaries of both the free estate and the pension, they have the option to take their full pension benefits. In this case, they may claim a refund from HMRC for any income tax paid on the portion of their benefits used to cover the inheritance tax charge.
  • When the beneficiaries of the free estate and the pension benefits are not the same individuals, personal representatives have a legal right to recover from pension beneficiaries the amount of inheritance tax paid on the pension. This recovered amount can then be distributed to the beneficiaries of the free estate.
• Pension beneficiaries ask pension scheme administrators to pay
  • Pension beneficiaries can work with personal representatives or directly with pension scheme administrators to pay any inheritance tax due on pension benefits.
  • The pension scheme administrator must pay the inheritance tax due if the amount is not more than the remaining death benefits due to the beneficiary under the scheme, and the amount due in respect of those benefits is £4,000 or more. The pension scheme administrator must pay the inheritance tax within 3 weeks of receiving the beneficiary’s payment request.
  • If the amount is less than £4,000, the scheme administrator has discretion whether they will be willing to pay amount due.  
• Pension beneficiaries take their pension benefits in full and pay inheritance tax directly
  • If the beneficiary takes the pension benefits in full, they can pay the inheritance tax directly and contact HMRC to arrange a refund for any income tax paid on the amount of the inheritance tax charge on their benefits
  • The same pension benefits will not normally be subject to income tax and inheritance tax on. HMRC will ensure there are mechanisms in place for pension beneficiaries to recover any overpayments of income tax, if needed. The exception would be if any unauthorised payments are made from the deceased individual’s pension benefits.

Case studies

Inheritance tax is paid directly from free estate.

Derek's total estate value is £2 million, with pension assets accounting for £1 million. He dies at age 77 without children.

Mary is not the beneficiary for the free estate, but she is the pension beneficiary. She is classified as a non-exempt higher rate taxpayer.

Inheritance Tax (IHT) is calculated as follows:

• Estate subject to IHT: £2,000,000 - £325,000 (nil-rate band) = £1,675,000
• IHT liability: £1,675,000 × 40% = £670,000

The personal representative pays the total charge, and recoups the £335,000 from Mary.

As a result, Mary receives:£1,000,000 (pension assets) minus £335,000 (payment of the IHT to the personal representative) minus £266,000 (income tax at marginal rate), resulting in a net amount of £399,000.

Pension beneficiaries direct pension scheme administrators to pay​

Frank’s total estate value is £4 million, with pension assets accounting for £2 million. He dies at age 81 without children.

Rebecca is not the beneficiary for the free estate, but she is the pension beneficiary. She is classified as a non-exempt higher rate taxpayer.

Inheritance Tax (IHT) is calculated as follows:

• Estate subject to IHT: £4,000,000 - £325,000 (nil-rate band) = £3,675,000
• IHT liability: £3,675,000 × 40% = £1,470,000

Rebecca directs the pension scheme administrators to pay £735,000 directly to HMRC towards the IHT liability.

As a result, Rebecca receives:£2,000,000 (pension assets) minus £735,000 (payment to HMRC) minus £506,000 (income tax at marginal rate), resulting in a net amount of £759,000.

Pension beneficiaries take pension benefits in full and choose to pay IHT direct to HMRC​

Veronica’s total estate is valued at £1 million, consisting entirely of pension assets. She dies age 79. She has no children.

There are no free estate beneficiaries; the sole beneficiary of the pension is Annabel who is a non-exempt additional rate taxpayer.

Inheritance Tax (IHT) is calculated as follows:

• Estate subject to Inheritance Tax (IHT): £1,000,000 - £325,000 = £675,000
• Net benefit after 45% income tax: £550,000
• Annabel pays IHT directly to HMRC: £675,000 × 40% = £270,000

Annabel reclaims additional rate tax on the IHT payment from HMRC: £270,000 × 45% = £121,500

As a result, Annabel’s receives: £550,000 (net benefit) minus £270,000 (payment to HMRC) add £121,500 (income tax reclaim) resulting in a net amount of £401,500.

What’s next?

The government will collaborate with industry experts and stakeholders to improve the process for reporting and paying Inheritance Tax on pensions. HMRC will manage this through its stakeholder groups, gathering input to develop tools and guidance for PRs, PSAs, and beneficiaries before the changes take effect in April 2027.

The government will also publish draft legislation in due course on the changes to the information sharing regulations.