Pension planning and Inheritance Tax planning have long been treated as separate conversations. For many families, that separation has shaped how wealth is passed on, with pensions often seen as sitting outside the estate entirely. However, the Autumn Budget on 30th October 2024 proposed a major change to that position in that, from 6th April 2027, most unused pension funds and pension death benefits will be treated as part of the estate for Inheritance Tax purposes. On 11th May 2026, HMRC published a technical note setting out the detail of what this change will look like (albeit with final regulations yet to come).
What is changing and when
From 6th April 2027, whatever remains in your pension when you die, and so any pension death benefits payable, will in most cases be counted as part of your estate for Inheritance Tax purposes. Once that happens, the same rules that apply to your property, savings, and investments will apply to your pension too. In practical terms, that means pension funds which may previously have passed free of Inheritance Tax could now increase the overall tax burden on your estate. What was less clear was how the tax would actually be worked out, reported, and paid, and that is where HMRC’s technical note indicates some important practical changes that are worth understanding.
Who is responsible for the tax
At the moment, when someone dies, it is largely the pension provider who handles what happens to the pension. Under the new rules, that responsibility shifts. It will be the executors of the estate who are responsible for telling HMRC about any pension assets and making sure any Inheritance Tax due on them is paid. The pension provider’s job becomes one of supplying information rather than managing the tax.
This represents a significant shift in responsibility for executors, who will now be central to ensuring that pension assets are properly identified, valued and reported to HMRC. They will need to track down every pension the deceased held, obtain valuations, and bring those figures into the overall Inheritance Tax calculation. Once they are satisfied that everything has been found and reported, they can apply for a certificate that protects them from personal liability if a pension turns up later that nobody knew about. That protection does not cover the beneficiaries themselves, though. If a pension comes to light after the estate has been wrapped up, the person who received the benefit can still be asked to pay the tax on it.
The practical importance of keeping records
One of the less obvious consequences of these changes is how much harder the executor‘s job becomes if the deceased’s pension arrangements are not clearly documented. Tracking down old pensions is not always easy, particularly where someone has worked for multiple employers over the years and built up several different schemes, some of which may be decades old. The single most useful thing you can do now is make sure you have a clear, up-to-date record of every pension you hold, and that the people who will one day administer your estate know where to find it. It sounds simple, but without it, executors can face delays, additional professional costs, and in some cases real difficulty in finalising the estate. A step further than keeping an up-to-date record of every pension would be to seek financial advice on whether or not you should consolidate multiple pensions into one to minimise the administration in the event of your death.
Before probate is granted
There is also a practical requirement that arises early in the process. Before probate has been granted, executors will need to prove their identity to pension providers. In practice, this is likely to involve providing a copy of the Will, evidence of identity, the death certificate, and a signed declaration confirming acceptance of the role. It is worth knowing this upfront, since it will need to be dealt with at a stage when there is already a great deal to organise.
How pension values will be calculated
Pension providers will be required to give executors the figures they need to report to HMRC. The value placed on the pension will be based on what it was worth at the date of death, with certain deductions made for benefits that fall outside the new rules, such as a pension payable to a dependant or a death-in-service payment. Providers will also need to confirm whether the person receiving the pension is exempt from Inheritance Tax, since that affects how the overall liability is calculated.
Making sure the tax gets paid
When Inheritance Tax is due on a pension, someone has to make sure it actually gets paid before the money reaches the beneficiary. The new rules give executors two ways to help manage this. They can ask the pension provider to hold back a portion of the benefit while the tax position is worked out, so the money does not simply get paid out before the bill has been settled. In addition, they can arrange for the pension provider to pay HMRC directly, rather than the beneficiary receiving the full amount and then having to deal with the tax themselves. These powers are essentially about making sure the tax is dealt with at source, rather than leaving the beneficiary to sort it out after the fact.
Pensions that are harder to cash in
Most pension funds hold investments that can be converted into cash relatively straightforwardly. Some, however, hold assets such as property that cannot easily be sold at short notice, which creates an obvious problem when a tax bill needs to be paid. Where selling the pension asset is not considered practical, beneficiaries will have the option of paying the Inheritance Tax from other funds they hold outside the pension. If your pension holds this kind of asset, it is worth taking advice sooner rather than later, since the options will depend on how your pension is structured and what other resources are available (if any).
What about Income Tax?
Inheritance Tax is not the only tax that may apply when a pension is passed on, and it is important to understand that the position does not end there. Income Tax can also come into play, and the two are entirely separate charges that can stack on top of one another. Whether Income Tax is due depends on how old the pension holder was when they died. If death occurs before age 75, pension benefits are generally passed on free of Income Tax. If death occurs at 75 or over, the recipient will pay Income Tax on what they receive at their usual rate. Where pension benefits are paid into a trust or into the estate rather than directly to an individual, the Income Tax charge is 45%, which is in addition to any Inheritance Tax already paid.
What still applies and what does not
Some familiar protections do carry over into the new rules. Pension benefits passing to a surviving spouse or civil partner, or to a charity, will remain exempt from Inheritance Tax. If the same pension assets happen to be taxed more than once within five years, there is relief available to prevent the full burden falling twice. For most people, however, the more important question is what no longer applies, particularly where existing estate planning has relied on pensions sitting outside the Inheritance Tax framework. If you own a farm or a family business, you may be aware that certain reliefs can significantly reduce your Inheritance Tax bill on those assets. Those reliefs will not apply to pension assets under the new rules. Equally, the option to pay Inheritance Tax in instalments, which can help where an estate includes assets that are difficult to sell quickly, will not be available for pensions.
What this means for your estate planning
For anyone who has structured their estate planning around the assumption that their pension would pass free of Inheritance Tax, these changes are significant, and they may require a careful review of existing arrangements rather than a simple adjustment. While further detail is expected in the final regulations, the direction of travel is now clear enough for individuals to begin reviewing their position. If you would like to understand what the new rules mean for your situation, please contact a member of our Private Client team.
