HMRC has released new details about how pensions will be taxed when someone dies after the age of 75, ahead of major inheritance tax changes due to come into force in April 2027. Under the new rules, most unused pension funds will be included in a person’s estate for inheritance tax purposes. This marks a significant change from the current system, where pensions are generally exempt from inheritance tax and can be passed on more tax efficiently.
For those who die after the age of 75, inherited pension savings are currently subject to income tax when beneficiaries withdraw money. From April 2027, however, the pension pot could first be liable for inheritance tax if the estate exceeds the relevant threshold. HMRC has confirmed that beneficiaries will only pay income tax on the amount remaining after any inheritance tax has been deducted. The measure is designed to prevent what has been described as a potential “double tax hit”.
The tax authority has also outlined new responsibilities for personal representatives, such as executors, who administer estates after a death. They will be required to take “reasonable steps” to identify pension savings, calculate their value and ensure any inheritance tax owed is paid.
This could involve contacting pension providers directly and gathering information from multiple schemes, particularly where the deceased held several pensions accumulated throughout their working life.
Another new measure will allow executors to ask pension providers to withhold up to 50% of certain lump-sum pension payments for up to 15 months while inheritance tax liabilities are calculated and settled.
Inheritance tax will still need to be paid within six months of death, with interest potentially charged on outstanding amounts after that deadline.
Despite the reforms, several key exemptions will remain. Transfers between spouses and civil partners will continue to benefit from existing inheritance tax allowances, meaning many couples can still pass on up to £1 million before the tax applies. Most death-in-service benefits will also remain exempt.
HMRC is expected to publish further guidance on the changes before the new regime takes effect on April 6, 2027.