Grieving families are facing delays in inheritance payouts following a major rule change by HM Revenue and Customs (HMRC) under the Labour Party government. From April 2027, pensions will be included in the estate of someone who has died, meaning beneficiaries may have to wait longer to receive their inheritance.
Current Rules and Changes
Currently, if a person dies before the age of 75, the beneficiary inheriting the pension does not pay tax on the retirement savings. If death occurs after 75, the beneficiary pays Income Tax when withdrawing from the pension, as it is treated as income. The new rules, first announced in the Autumn 2024 Budget, will bring pensions into the estate for Inheritance Tax purposes.
Technical Note Details
The government has now published a technical note outlining the changes in more detail, following confirmation by Chancellor Rachel Reeves. Personal representatives will be responsible for identifying the deceased person's pensions, reporting them, and paying any Inheritance Tax due. Households can request that the pension provider pay the tax directly to HMRC. However, death in service payments will not be liable for Inheritance Tax under these changes.
HMRC Statement
An HMRC spokesperson said: "We want to help people get their tax right and we're continuing to provide information about how the taxation of unused pension funds and death benefit will work. More than 90% of estates will continue to pay no Inheritance Tax. Some pension benefits – including payments to spouses and civil partners – are exempt from inheritance tax, so cannot be withheld."
Impact on Estates
The shake-up means a further 5,000 estates became liable for Inheritance Tax during the last tax year. In 2025/26, there were 32,000 estates subject to Inheritance Tax, up by 5,000 since rates reached their current level in 2020/21. Families are advised to seek professional advice to navigate the new rules and plan accordingly.
