Inheritance Tax on pensions – 5 ways you can prepare

The 2024 Autumn Budget introduced a fundamental shift to Inheritance Tax on pensions. From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of an individual’s estate for IHT purposes.  

This marks a significant departure from the current position where pensions have typically sat outside the estate and have been widely used as an efficient way to pass on wealth.  

The Government introduced these changes to remove the ‘distortion’ of using a pension fund as a vehicle for the transfer of wealth rather than for funding an individual’s retirement and to ensure fairness and consistency in the tax treatment of different pension types. 

On 11 May 2026, HMRC published their technical note expanding on the legislation and providing further detail on how these rules will operate in practice. While many of the headline changes were already known, the technical note is particularly helpful in clarifying how the changes to Inheritance Tax on pensions will be administered and the central role of Personal Representatives (“PRs”). 

Everything you need to know about the changes to Inheritance Tax on pensions 

What are the changes to inheritance tax on pensions? 

From 6 April 2027, most unused pension assets and death benefits will be included in the deceased’s estate for IHT purposes. This could give rise to an effective 40% tax rate. This charge will apply to the value of the notional pension property, which is broadly the total value of the pension arrangements at death – excluding certain benefits. 

Excluded benefits for these purposes include dependants’ scheme pensions, trivial commutation payments, joint life annuities, and death-in-service benefits.  

The technical note confirms a key concern, being that where an individual dies aged 75 or over, not only can the pension value suffer Inheritance Tax at 40%, but the pension benefits may also be subject to Income Tax in the hands of the beneficiaries. This creates the potential for an effective tax rate of up to 67%. 

As we highlighted in our earlier blog on Self-Invested Personal Pensions (“SIPP”) and commercial property, pensions have historically been a cornerstone of estate planning. 

From 2027, the position changes materially as commercial property in SIPPs will effectively fall within the IHT net if undrawn at death. This brings practical challenges such as liquidity constraints, business risk, and reduced planning flexibility. 

These issues are compounded by the new administrative burden placed on PRs. 

THE ROLE OF THE PERSONAL REPRESENTATIVE 

One of the most important clarifications from HMRC’s technical note is that PRs will sit at the heart of the new regime. PRs will be responsible for reporting pension values as part of the estate and paying any IHT due on pension property. Payment of any IHT remains due within six months from the date of death, with interest on late payments accruing thereafter. 

The technical note reinforces the notion that pension scheme administrators are not primarily responsible for IHT reporting or payment, and that the burden of compliance will remain with the PRs. 

PRs will also be expected to take reasonable steps to identify any pension schemes from which death benefits may be payable. This will include reviewing financial records and correspondence, engaging with advisers and family members, and contacting pension providers and insurers. This mirrors existing estate administration duties but with a greater degree of complexity, particularly where individuals hold multiple pension arrangements, which is not helpful during a time of bereavement. 

PRs must request from pension scheme administrators the value of the notional pension property at the date of death, and a breakdown between exempt beneficiaries (e.g. a spouse or civil partner) and non-exempt beneficiaries. 

Administrators are expected to respond to this request for information within 28 days. If this is not possible, they must provide an estimated value that PRs may rely on, having taken all reasonable steps to obtain the appropriate valuations. 

The valuation of assets can be particularly complex where pensions hold illiquid assets, such as commercial property in SIPPs, which could have the adverse effect of delaying the estate administration process. 

PRs will have the ability to issue a withholding notice, requiring pension scheme administrators to retain up to 50% of the beneficiary’s entitlement to cover potential IHT. 

However, HMRC is clear that this is not intended as a default approach; rather, it should only be used where the PR knows or reasonably expects that IHT will be due. 

This introduces a judgment call for PRs, balancing protecting the estate from underpayment of IHT and avoiding unnecessary payment delays.

A further important point is that where pension benefits are paid at the discretion of trustees, the beneficiaries can become jointly and severally liable for IHT alongside PRs. This represents a shift in risk as beneficiaries may be exposed to tax liabilities even where they do not control the administration process in full. 

5 Steps You Can Take To Prepare for the changes to Inheritance Tax on pensions

While there’s no need to panic, early planning is essential. To prepare for the changes to Inheritance Tax on pensions, you should consider: 

1. Reviewing pension nominations and expression of wishes forms, particularly where discretionary structures could create complexity or unexpected liabilities. 
2. Explore drawdown strategies to reduce unused pension assets. 
3. Consider alternative structures such as Family Investment Companies or Trusts for property ownership. You could also consider the pros and cons of selling commercial property back to the trading company (where applicable). 
4. Model IHT exposure and liquidity needs to avoid forced sales. 
5. Engage with your tax adviser, financial planner, and legal advisers to align pension strategy with estate planning. 

How AAB Can Help 

Reforms to Inheritance Tax on pensions represent a fundamental shift in how these funds are treated on death. For business owners and high-net-worth individuals who will be affected by these changes, this is the time to revisit pension structures, succession plans, and tax mitigation strategies.  

Advice should always be taken before reviewing your pension arrangements. If you would like to discuss any of the points raised above, then please do not hesitate to get in contact with Steve Roberts, your usual contact, or one of our experts in the Private Client tax team or AAB Wealth.