HMRC has confirmed a major shake-up to inheritance tax rules that could affect millions of pension savers from April 2027. The Labour Party government's tax department has published fresh details explaining how unused pension funds and death benefits will be treated under the new rules.
Key changes from April 2027
From April 6, 2027, most unused pension pots and death benefits will be included when calculating the value of an estate for inheritance tax purposes. This marks a big change from the current system, where pension savings are generally excluded from inheritance tax calculations.
The Government has argued that pensions have increasingly been used as a tax-efficient way to pass on wealth rather than solely as a means of providing retirement income.
New responsibilities for executors
One of the biggest changes will affect those responsible for dealing with a person's estate after their death. HMRC said personal representatives and executors will be expected to take reasonable steps to identify pension savings, establish their value, and make sure any inheritance tax owed is paid correctly. This could involve checking financial paperwork, reviewing bank statements, and contacting pension providers or insurance companies where necessary.
Irwin Mitchell Solicitors said relatives often struggle to locate pension savings because of fragmented records, historic workplace schemes and multiple providers. Irwin Mitchell commented: "The manual refers to 'looking through all the deceased's papers', but what about online records, and the passwords needed to access them?"
Payment deadlines and new withholding arrangement
HMRC has also confirmed that inheritance tax on pension funds brought into the new system will generally need to be paid within six months of a person's death. Interest may be charged on unpaid tax if the deadline is missed.
To help manage potential tax bills, a new withholding arrangement is being introduced. Under the proposals, executors will be able to ask pension providers to retain up to 50% of lump sum pension payments that could become liable for inheritance tax for up to 15 months. The measure is designed to prevent pension benefits being paid out before any outstanding inheritance tax has been settled.
People are now being urged to keep track of their pension savings and make sure their records are up to date ahead of the changes.
