Labour Prime Minister Andy Burnham has appointed John Healey as Chancellor of the Exchequer, succeeding Rachel Reeves. Healey will oversee a series of six changes to private pensions scheduled for 2027, which were originally announced by Reeves. His first Budget is set for October 28, but he will not be able to alter the already-established pension reform path.
Inheritance Tax on Pensions from April 2027
From 6 April 2027, unused pension funds and pension death benefits will be included in the deceased's estate for inheritance tax (IHT) purposes. This marks a significant shift, as pensions were previously exempt from IHT. The change applies to members who die on or after that date, affecting both defined contribution and defined benefit schemes.
Currently, IHT is payable at 40% on estates exceeding the nil-rate band of £325,000 and the residence nil-rate band of £175,000, where applicable. Under the new rules, the value of unused pension funds will count towards the estate, unless paid to a surviving spouse, civil partner, or registered charity.
Residual Value and Scheme Discretion
The residual value of a pension fund—meaning any funds not drawn down from a defined contribution pension or, for defined benefit schemes, the pension protection lump sum death benefit—will be included in the estate on death. Scheme discretion will no longer determine the treatment of unused benefits for IHT purposes.
Spousal and charity exemptions will be extended to cover residual pension funds left to spouses, civil partners, and charities on death. Nominee annuities are out of scope, as they are considered continuing annuities for ongoing income payments rather than wealth transfers.
Tax Relief Changes
Business relief (BR) and agricultural relief (AR) will not be available for assets held within a pension scheme. This means that pension assets will not benefit from these reliefs, potentially increasing the IHT liability on estates that include such assets.
Government documentation states: "It is common for the value of the estate to change. It will remain the personal representative’s responsibility to inform HMRC of any amendments and they will be liable for any changes to Inheritance Tax as a result."
Beneficiary and Representative Responsibilities
If the notional pension property is vested in pension beneficiaries, they will be jointly and severally liable for any additional IHT and interest due on their benefits. The IHT cost should be borne by the beneficiary receiving the pension, but administration will rest with the personal representative (PR) or executor.
Personal representatives or beneficiaries can instruct scheme administrators to pay inheritance tax directly to HMRC. From 6 April 2027, personal representatives will be responsible for reporting and paying any IHT due on unused pension funds and death benefits.
Impact on Estates and Beneficiaries
These changes could affect both the IHT and income tax position for beneficiaries. Personal representatives, supported by HMRC guidance and tools, will be responsible for informing beneficiaries of amendments and the potential impact on their tax position. The changes are part of a broader set of pension reforms announced by the previous Chancellor and now to be implemented under Healey's stewardship.
