New pensions and IHT proposals ‘good news for pension schemes, bad news for bereaved families’

HMRC has published the outcome of its consultation on the proposal to include ‘unspent’ balances in Defined Contribution pension pots as part of people’s estates for Inheritance Tax purposes, with effect from April 2027.

The consultation response makes clear that ‘death in service’ benefits will not be included, which is welcome, but proposes a major shift from the original proposal.

When the measure was initially announced at the time of the Autumn 2024 Budget, it was envisaged that pension schemes and providers would be responsible for paying their share of the IHT bill, only paying out the pension balance after the IHT had been paid.

Today, HMRC has announced that instead of pension schemes paying the bill, the ‘Personal Representative’ (who could be a family member of the deceased) will be responsible for paying all of the IHT bill.

HMRC say:

“Personal representatives already report and pay Inheritance Tax on the deceased’s estate…They will now be required to report and pay the Inheritance Tax due on discretionary pensions, but all parties will need to work together to do this. Personal representatives will need to collect and share information from all the deceased’s pension schemes and pension beneficiaries. They already need to contact all the pension schemes, but will now need to collect information if needed for filing an Inheritance Tax account. This measure will require personal representatives, in addition, to report the amount of tax attributable to each pension scheme”.

(Source: Inheritance Tax on unused pension funds and death benefits)

The Government has also set out complex new processes where Personal Representatives (who may not even be the beneficiaries of the pension) can get the IHT paid. This includes potentially getting beneficiaries to ask pension schemes to pay the IHT for them. HMRC also set out complex new arrangements for beneficiaries to claim back overpaid income tax if they have been taxed on a pension, part of which has then been subject to IHT.

Commenting, Steve Webb, partner at pension consultants LCP, said:

“Life is tough enough when you have just lost a loved one without having extra layers of bureaucracy on top. In future, the person dealing with the estate will need to track down all of the pensions held by the deceased which may have any balances in them, contact the schemes, collate all the information and put it into an online calculator and then work out and pay the Inheritance Tax bill. All of this has to be done before a probate application can be made, potentially substantially slowing down the process of winding up an estate. Complications will no doubt arise where the family member cannot track down all of the deceased persons pensions or where providers are slow to supply the information needed to work out the IHT bill.

HMRC will have to give serious thought to the penalty rules around late payment of IHT to ensure that grieving families are not at risk of fines in cases where delays in resolving matters relating to pensions are not under their control. Whilst the changes HMRC has made are undoubtedly good news for pension schemes and those who administer them, it is hard to see that they are good news for bereaved families”.