HM Revenue and Customs (HMRC) has confirmed a major shake-up to inheritance tax rules that could affect millions of pension savers from April 2027. People are now being urged to keep track of their pension savings and make sure their records are up to date ahead of the changes.
The warning comes after HMRC published fresh details explaining how unused pension funds and death benefits will be treated under the new rules. From April 6, 2027, most unused pension pots and death benefits will be included when calculating the value of an estate for inheritance tax purposes. That marks a big change from the current system, where pension savings are generally excluded from inheritance tax calculations.
The Government has argued that pensions have increasingly been used as a tax-efficient way to pass on wealth rather than solely as a means of providing retirement income.
One of the biggest changes will affect those responsible for dealing with a person’s estate after their death.
HMRC said personal representatives and executors will be expected to take “reasonable steps” to identify pension savings, establish their value and make sure any inheritance tax owed is paid correctly.
This could involve checking financial paperwork, reviewing bank statements and contacting pension providers or insurance companies where necessary.
However, legal experts have warned that this may create additional difficulties for families.
Irwin Mitchell Solicitors said relatives often struggle to locate pension savings because of “fragmented records, historic workplace schemes and multiple providers”.
The firm also raised concerns about the growing use of online records and digital accounts.
Irwin Mitchell said: “The manual refers to ‘looking through all the deceased’s papers’, but what about online records, and the passwords needed to access them?”
HMRC has also confirmed that inheritance tax on pension funds brought into the new system will generally need to be paid within six months of a person’s death.
Interest may be charged on unpaid tax if the deadline is missed.
To help manage potential tax bills, a new withholding arrangement is also being introduced. Under the proposals, executors will be able to ask pension providers to retain up to 50% of lump sum pension payments that could become liable for inheritance tax for up to 15 months.
The measure is designed to prevent pension benefits being paid out before any outstanding inheritance tax has been settled.
Personal representatives and beneficiaries will also be able to ask pension providers to send inheritance tax payments directly to HMRC.
HMRC said inheritance tax will be applied before any income tax is charged on inherited pension funds. This means beneficiaries would only pay income tax on the remaining balance, helping to avoid double taxation.
Despite the changes, several existing protections will remain in place. Unused inheritance tax allowances will still be transferable between spouses and civil partners.
This means some couples may still be able to pass on estates worth up to £1million without paying inheritance tax, subject to current thresholds and allowances.
HMRC also confirmed that most death-in-service benefits will remain outside the scope of the new rules.
Joint life annuities and dependants’ scheme pensions will also remain exempt.
Further regulations and guidance are expected before the changes come into force in April 2027.
More information can be found here.