Inheritance Tax on Pension Death Benefits – Revised Proposals

The government has responded to its consultation on its proposal that from 6 April 2027, most death benefits paid from registered pension schemes (whether DB or DC) will form part of the deceased member’s estate for inheritance tax (“IHT”) purposes. While the government is proceeding with its proposals, it has made two key changes which should make the changes less onerous for schemes.

Background

Currently, most death benefits paid from registered pension schemes do not fall within the deceased member’s estate for IHT purposes. The Autumn Budget 2024 announced that from 6 April 2027, most death benefits paid from registered pension schemes, including death in service benefits, would form part of the deceased member’s estate for IHT purposes. Schemes would be responsible for reporting and paying any IHT due on death benefits. For more information on the Budget announcement, please see our legal update.

Updated proposals

The government has now responded to its consultation on the proposals. It is also consulting on draft legislation making the necessary legislative changes. The consultation closes on 15 September 2025.

The government has made two key changes to its proposals:

In scope death benefits

All death benefits payable from registered pension schemes will form part of the deceased member’s estate for IHT purposes except for the following:

• Dependants’ scheme pensions (i.e. pensions paid to a dependant such as the member’s spouse or child).
• Death in service benefits, regardless of whether they are discretionary. (This marks a change from the current position where non-discretionary death in service benefits do form part of the member's estate for IHT purposes.)

The government’s consultation stated that charity lump sum death benefits would also be out of scope. However, the draft legislation does not exclude them from the member’s estate. It may be that this is an oversight that will be remedied in the final version of the legislation.

Liability for reporting and paying IHT

The deceased member’s personal representatives (“PRs”) rather than the scheme will be responsible for reporting and paying any IHT payable on death benefits. However, an option will be introduced whereby beneficiaries receiving a death benefit with a value of £4,000 or more will be able to direct the scheme to pay the IHT due on that benefit on their behalf. Schemes will also be able (but not required) to offer this facility for death benefits with a value of less than £4,000.

New provision of information requirements will be imposed on PRs and schemes to ensure they exchange all the necessary information to enable them to comply with their respective obligations. The government will consult at a later date on draft regulations setting out these requirements.

Implications and next steps

Schemes

The decision to make PRs rather than schemes responsible for reporting and paying any IHT due will significantly reduce the impact of the changes for schemes. However, the changes will still impose important additional duties on schemes and their processes and communications around distribution of death benefits will need to be updated from April 2027 to reflect these. Until the full details of the new provision of information requirements are published, it is difficult to state with certainty what updates will be required so schemes should monitor further publications from the government in this respect. The government has not indicated when it intends to publish the draft regulations for consultation.

In addition, in the lead-up to April 2027, schemes may wish to consider sending a communication to members informing them of the changes and reminding them of the importance of keeping their death benefit nomination forms up to date. Any such communications will need to be drafted carefully to make it clear which death benefits provided by the scheme are within the scope of the changes, as under the government’s proposals IHT may become payable on less frequently paid lump sums (for example lump sums payable on death in deferment or five year pension guarantee lump sums). Trustees may also want to remind members that IHT is not payable on transfers between spouses and civil partners but is payable on transfers between couples who are not married or in a civil partnership.

Employers

The exemption of death in service benefits from the scope of the changes means that employers are unlikely to need to make changes to the way in which they provide death in service benefits.