Draft Rules Issued: Inheritance Tax on Pension Death Benefits Coming in 2027

The clock is ticking. From April 2027, discretionary pension death benefits could face Inheritance Tax (IHT) for the first time since before 2015, changing the landscape for retirement and estate planning.

HMRC has now published draft legislation, confirming that pension death benefits will not be as sheltered from IHT as they have been since 2015. But there is good news for executors: the responsibility for paying the tax will now fall to personal representatives (PRs), not pension scheme administrators. It is a simplification, but it remains a significant shift that demands attention and expert planning.

 

What You Need to Know

1. Pensions officially in the Inheritance Tax (IHT) net

From April 2027, any discretionary pension death benefit paid to non-exempt beneficiaries (i.e., anyone other than a spouse or civil partner) could be subject to IHT. While pensions have long been a powerful estate planning tool, this change marks a new era.

 

2. Business relief does not apply

Speculation that holding AIM-listed assets in pensions could sidestep IHT has now been ruled out. Business relief will not reduce pension IHT exposure – another reason why specialist planning matters more than ever.

 

3. 4-Stage Process

HMRC outlines a clear, though still complex, framework:

• Stage 1: Scheme administrators have four weeks to value benefits post-death.
• Stage 2: PRs must gather values across all pension schemes and aggregate these with other estate assets.
• Stage 3: If IHT is due, PRs must submit the account, notify HMRC, the scheme, and the beneficiaries.
• Stage 4: IHT-free benefits can be paid immediately. If tax is due, options include deduction by the scheme, direct payment by the beneficiary, or covering it via the estate.

Key twist: Non-exempt beneficiaries are now jointly liable for any IHT on their portion, raising serious financial planning questions for anyone passing on significant pension wealth.

 

Additional Clarifications

• Death in service schemes remain IHT-free – consistency at last.
• Joint life annuities? Still outside the IHT net, even for non-spouses.
• Trivial commutation lump sums (under £30,000) may now be included in IHT assessments, unless sourced from a dependent’s scheme pension.

The rules may still be in draft form, but the direction is clear: the government is pushing forward, and planning assumptions need to evolve now, not in 2027.

 

Get in Touch

As specialists in retirement and estate planning, Rosebridge is helping clients:

• Review how pension wealth fits into their wider estate
• Understand how their beneficiaries may be affected
• Explore strategies to manage future tax exposure

To understand how the upcoming Inheritance Tax changes to pension death benefits could affect your estate or your loved ones, speak to our experienced team of Chartered Financial Planners.

Ramsbottom office: Email enquiries@rosebridgeltd.com or call 01204 300010
Chester office: Email enquirieschester@rosebridgeltd.com or call 01244 569141
Leeds office: Email enquiriesleeds@rosebridgeltd.com or call 0113 243 7100

 

Please Note

The Financial Conduct Authority does not regulate Estate Planning or tax advice. This is for information purposes only and does not constitute advice. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.