Finance Act 2026: Inheritance Tax Treatment of Pension Death Benefits

The Finance Act 2026 has received Royal Assent, establishing the legal framework for the significant changes to the inheritance tax (IHT) treatment of death benefits paid by registered pension schemes that were announced in the Autumn Budget 2024. These changes will come into force on 6 April 2027. This Legal Update summarises the key changes and what they mean for trustees.

How will Death Benefits be Taxed from April 2027?

Lump sum death benefits

Most lump sum death benefits will form part of the deceased member’s estate for IHT purposes, regardless of whether they are paid at the trustees’ discretion. The key exceptions are:

• Death in service benefits (whether paid at the trustees’ discretion or otherwise); and
• Charity lump sum death benefits.

Income tax will continue to be payable on lump sum death benefits if the member dies aged 75 or over, or if their lump sum and death benefit allowance is exceeded, in addition to any IHT payable. However, where both income tax and IHT are payable, the legislation contains provisions to prevent double taxation.

Dependants’ scheme pensions

Dependants’ scheme pensions will remain outside the member’s estate for IHT purposes. Each pension payment will continue to be subject to income tax.

Dependants’ scheme pensions which are converted into a trivial commutation or small lump sum death benefit will also remain outside the member’s estate for IHT purposes. The lump sum will continue to be subject to income tax.

Will IHT Always be Payable?

No. The government estimates that only around 8% of estates will be affected by these changes. Whether IHT is payable will depend on the total value of the member’s estate and the availability of any exemptions. In particular, the first £325,000 of an individual’s estate is exempt from IHT. In addition, no IHT is payable on assets inherited by an individual’s spouse or civil partner.

Who will be Responsible for Reporting and Paying Any IHT Due?

The deceased member’s personal representatives (PRs) will be primarily responsible for reporting and paying any IHT due on death benefits.

However, a PR (or any person who expects to become a PR) will be able to submit a “withholding notice” directing the scheme to withhold up to 50% of any death benefits that may be subject to IHT for up to 15 months, in order to give the PR time to establish whether any IHT is in fact payable. Schemes are not required to withhold benefits that are excluded from the member’s estate (e.g. death in service benefits) or are exempt from IHT (e.g. benefits paid to a member’s spouse or civil partner).

PRs and beneficiaries will also be able to submit a “payment notice” directing the scheme to pay the IHT due on a death benefit. To be valid, among other conditions, the notice must specify the amount of IHT to be paid and that amount must not be less than £1,000.

Importantly for trustees, schemes will only be liable for IHT on death benefits where:

• They pay benefits in breach of a withholding notice (in which case they are liable for the IHT payable on those benefits); or
• They have failed to comply with a payment notice (in which case they are liable for the unpaid IHT specified in the notice).

What Information are We Still Waiting For?

New information-sharing requirements will be introduced to ensure PRs and schemes exchange all the necessary information to enable them to comply with their respective obligations. The government intends to consult this spring on draft regulations setting out these requirements.

In addition, the government and HMRC intend to publish:

• A list of clarifications to common questions that have been raised by industry (expected later this spring); and
• Detailed guidance for scheme administrators (draft guidance expected in autumn/winter 2026).

What Should Trustees Be Doing?

With just under a year until the changes take effect, trustees should now be taking steps to prepare. If they have not done so already, trustees should begin discussing with their administrator what changes will need to be made to their scheme’s administration and governance processes around the distribution of death benefits. The new information-sharing requirements will be central to this, so trustees and administrators should keep a close eye on publication of the consultation on the draft regulations.

Trustees should also consider what changes will need to be made to their existing member communications about death benefits. They should also consider whether to send a specific communication to members informing them about the forthcoming changes.

How Can Mayer Brown Help?

We can help trustees prepare for the changes by:

• Providing training/knowledge sessions;
• Reviewing administration agreements, including service level agreements, and advising on any updates that may be required;
• Advising on changes that may be required to death benefit decision-making procedures; and
• Drafting and reviewing member communications.