Historically, pension contributions have sat largely outside a person’s estate for Inheritance Tax (IHT) purposes. However, this rule looks to be getting a significant overhaul by the UK Government, with proposed changes set to come into place on 6 April 2027.
These reforms are set out in the Finance Act 2026, which received Royal Assent in March 2026 and brings unused defined contribution pension funds within the scope of IHT.
With this change in legislation on the horizon, more estates than ever will be subject to IHT, and the beneficiaries of pensions from the deceased will be subject to strict rules regarding how and when HMRC is paid. This makes now the best time to take a step back and reassess your succession plan.
At Laytons ETL, we stay on top of all relevant law and legislative changes that will impact our clients. So, what exactly are the changes, and how can you best prepare for them?
What Are the Changes?
From 6 April 2027, unused pension funds will generally be included within the value of your estate for IHT. (An unused pension fund simply means any money in your pension that you haven’t drawn on yet).
Where the size of the estate is over the IHT threshold, pensions will be liable for 40% IHT, followed by an income tax bill for drawing the remaining benefits, if the original pension holder has died after the age of 75.
All death-in-service benefits (such as life cover provided through pension schemes) will be excluded from estate valuation entirely, even if paid from a registered pension. This includes public sector schemes previously taxed.
Reporting Process
Personal representatives (PRs), typically the executors of the estate, will become liable to report and pay the IHT on pension assets. However, there will be an option allowing beneficiaries to instruct schemes to pay the IHT directly.
The process goes as follows:
The PRs will contact the pension scheme to confirm that the member has died.
The pension scheme then has 4 weeks to value the scheme and confirm the value to the PRs.
The PRs will gather all the information from the deceased member’s pension schemes and establish how much (if any) IHT is due, as well as each schemes share.
They will then submit this account to HMRC (HMRC have confirmed they will be providing online tools and calculators to help with this).
The PRs will inform the beneficiaries (once known) and the Pension Scheme Administrator (PSA) of their share of the amount of IHT due.
By this point, the PSA will have started the process of identifying the beneficiaries and once the IHT figure is known they will contact the beneficiaries that they are now jointly liable with the PR for any IHT due.
Payment Process
There are three main options for paying any IHT due:
Pay directly from the estate: PRs can pay any IHT due on the entire estate, including pensions, directly from funds on the estate.
The PSA can pay it directly to HMRC (once instructed to do so): Beneficiaries can instruct the PSA to pay the IHT on their behalf to HMRC.
The beneficiaries can take out their pension benefits and pay the full IHT directly to HMRC.
The PR can also direct the PSAs to issue a withholding notice; this withholds up to 50% of the pension benefits for a limited period. This can be beneficial if the full extent of IHT liable isn’t yet known, as it means there are guaranteed funds available to pay the tax should the value increase from an initial assessment.
How You Can Prepare for the Changes
At Laytons ETL, our Private Wealth & Philanthropy team are on hand to assist you with all your estate planning needs. Contact us today for a tailored plan that suits you.
In light of these changes, individuals may want to consider the following two strategies:
Using ISA investments, spending pension assets during lifetime, or using Whole-of-Life insurance policies, especially if planning for legacy and IHT optimisation.
Update wills and estate plans to reflect these changes, including using trusts or direct gifting strategies.
For advice implementing changes to your estate plan, and for any guidance on these updates, speak to a member of our Private Wealth & Philanthropy team today.
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Disclaimer: This publication is provided by Laytons LLP for informational purposes only. The information contained in this publication should not be construed as legal advice. Any questions or further information regarding the matters discussed in this publication can be directed to your regular contact at Laytons LLP or Laytons’ Private Wealth & Philanthropy team.
