Inheritance Tax proposals frequently asked questions

Most unused pension funds and death benefits will be counted as part of an individual’s estate for inheritance tax purposes. As a result, they may be subject to taxation upon death, regardless of whether the pension scheme had discretion over the allocation of the funds.

However, the government has confirmed that all death in service benefits and dependant’s scheme pensions are excluded.

Please refer to Inheritance Tax on Pension Death Benefits from April 2027 for a comprehensive list of pension death benefits that are included within scope, as well as those that are excluded.

Yes. Death benefits paid to a surviving spouse or civil partner are exempt. Additionally, charity lump sum death benefits are also excluded from the valuation of an individual’s estate.

HMRC Inheritance Tax Manual - IHTM11031: Spouse or civil partner exemption

The draft regulations amend the Inheritance Tax Act 1984 to include pension drawdown benefits in the calculation of a person’s estate for inheritance tax purposes.

The income tax situation hasn’t changed so benefits are still tax-free if the deceased dies under age 75 – it’s tax-free assuming allocated to drawdown/ lump sum paid out - within 2 years starting on the date on which the scheme administrator first knew of the individual's death or, if earlier, the day when they could first reasonably have been expected to know of it. Benefits are taxable if the deceased died on or after age 75 at the recipient’s marginal rate.

The consultation published by the Government confirms that annuity protection lump sum death benefits will be included in value of estate for inheritance tax.

Additionally, payments made under a scheme pension or lifetime annuity during a guaranteed term are included in the value.

The personal representatives (usually the executors of the will) will primarily be responsible for reporting and paying any inheritance tax due on pension funds and death benefits. The personal representative and beneficiaries will have options for paying the IHT:

• The inheritance tax can be paid from the free estate.
• Pension beneficiaries ask pension scheme administrators to pay.
• Pension beneficiaries take their pension benefits in full and pay inheritance tax directly

For more details on each of these options see Inheritance tax on pension death benefits from April 2027.

The existing income tax regulations regarding inherited pensions will remain in effect. For instance, where the deceased was aged over 75 at the time of death, any resulting death benefits will be subject to income tax at the beneficiary’s marginal rate.

However, to avoid the double taxation of the benefits, the draft regulations provide that income tax will not be payable on any portion of relevant death benefits equivalent to the inheritance tax due on that pension. HMRC will implement appropriate mechanisms to enable pension beneficiaries to reclaim any excess income tax paid.

The inheritance tax can be taken from the pension fund itself before any death benefits are paid out.

However, if the inheritance tax is not paid from the pension scheme, the individual may have to claim the overpaid income tax back from HMRC.

Like the question above, if inheritance is due on the funds, income tax is not payable on any portion of the relevant death benefits equivalent to the inheritance tax due on that pension.

However, if the inheritance tax is not paid from the pension scheme, the individual may have to claim the overpaid income tax back from HMRC

Lump sum payments made into a bypass trust on death will be in scope and included in the deceased’s inheritance tax calculation.

Although the payment of the death benefit into the trust will not escape inheritance tax, the trust may still offer advantages. The trust will keep funds out of the spouse’s estate but being discretionary the trustees can advance funds to the spouse or even make loans to them.

These will continue to receive 50% business relief and will not use up the £1m allowance.

Anti-forestalling measures mean that the £1 million allowance will apply to failed lifetime transfers made on or after 30 October 2024 if the donor dies on or after 6 April 2026.

For example, if an individual gifted business assets on 1 January 2025 there would be no immediate inheritance tax charge. However, if death occurred on or after 6 April 2026 but before 31 December 2031 then the £1 million limit will apply for the purposes of recalculating the inheritance tax.

No, if an individual doesn’t use the whole £1 million allowance, on death, it cannot be transferred to a spouse or civil partner.

From April 2026 shares held in companies not listed on recognised stock exchanges (such as AIM companies and EIS shares listed on AIM) will be reduced to 50% relief. These shares will not be included in the combined value of business and agricultural property that attracts 100% relief up to the £1 million allowance.