HMRC has released new details about how pensions will be taxed when someone dies after the age of 75. From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person’s estate for Inheritance Tax purposes.
Why the Change?
This removes distortions which have led to pension schemes being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement. It also removes inconsistencies in the Inheritance Tax treatment of different types of pensions, the Labour Party government has said.
Effective Date
This change is effective for deaths on or after 6 April 2027. If the pension scheme member dies before 6 April 2027, then the current rules will apply even if pension benefits are paid to their beneficiaries after this date.
Technical Details
The technical note provides information on how notional pension property is identified, valued and allocated to beneficiaries and who is responsible for reporting and paying any Inheritance Tax due. It also reveals the use of withholding notices and the pensions direct payment scheme - and how the reforms interact with existing Income Tax rules on pension death benefits.
Aim of Reforms
These reforms aim to prevent pension schemes from being used and marketed to transfer wealth to a beneficiary without paying the tax liabilities due, rather than used as a savings plan to build up income for retirement. It also establishes a consistent approach to Inheritance Tax treatment of different pension types.
Clearance Certificates
The note also provides clarification on the position where a new pension related asset is discovered after an estate has been reviewed by HMRC, and a clearance certificate has already been issued (meaning the Inheritance Tax position is considered mostly settled). In this case, the personal representatives are required to notify HMRC. HMRC have clarified that these representatives will not be personally liable for the tax and will not have to pay more tax on anything already covered by the certificate. Instead HMRC will calculate the additional tax due and collect it through the usual procedures.
