HMRC has released new details about what is often called the 'most hated tax' – inheritance tax (IHT). From April 2027, the rules are changing to include most unused pension funds and death benefits in the estate for tax purposes.
Current Rules and Upcoming Changes
Currently, pensions are shielded from IHT. However, a shake-up by the Labour government means personal representatives – those managing an estate after someone dies – will be legally required to take 'reasonable steps' to track down all pension assets. Under existing rules, if a person dies after turning 75, beneficiaries usually inherit the pension free of IHT but must pay income tax on any withdrawals.
New Framework from 2027
The new framework introduces a strict order to mitigate the impact of a double-tax hit. First, the pension value is added to the estate. If the total estate exceeds the tax-free threshold, a 40% inheritance tax is applied. Second, beneficiaries will then only pay income tax on the money that remains after the IHT deduction.
Irwin Mitchell Solicitors highlights that families often face 'fragmented records, historic workplace schemes and multiple providers'. The firm commented: 'The manual refers to looking through all the deceased's papers, but what about online records, and the passwords needed to access them?'
Exemptions and Allowances
If you are married or in a civil partnership, any tax-free allowance you do not use can be added to your partner's allowance when they die. This means a couple can pass on as much as £1 million without their estate being subject to inheritance tax. HMRC has also stated that most 'death in service' benefits will remain exempt, but may need to be reported to them by pension scheme administrators. Joint life annuities and dependents' scheme pensions are also exempt from the new legislation.
Implementation Timeline
Under the HMRC timeline, from spring 2026, the tax department will publish draft regulations on information sharing requirements. This summer, it aims to make and lay the regulations on information sharing requirements with a commencement date of 6 April 2027. From autumn, it will continue process design and develop guidance and other support tools, sharing draft guidance with industry stakeholders. Over winter, it will launch communications to publicise upcoming changes to impacted groups, and next spring it will publish guidance and other supporting materials.
