No U-Turn: Pensions and Inheritance Tax as Royal Assent Looms

Overview

The Finance (No.  2) Bill is set to receive Royal Assent, confirming that unused pension funds will fall within the scope of inheritance tax for the first time from April 2027.  This marks one of the most significant shifts in pension taxation in a decade.

Key Changes Introduced by the Finance Bill

1. Pensions Brought into the IHT Net

• Unused pension funds will be taxed at up to 40% IHT.
• Pensions will be treated similarly to other estate assets.
• Long‑standing estate planning strategies centred on pension preservation will need revisiting.

2. New Powers for Personal Representatives (PRs)

To prevent estates being left unable to settle IHT on pension assets:

• PRs can pause distribution of inherited pensions.
• Up to 50% of the pension can be retained.
• Retention period: up to 15 months.
• Applies to current and prospective PRs.

Why this matters

• Prevents pension pots being fully paid out before IHT is calculated.
• Reduces risk that PRs face personal liability for unpaid tax.
• May create tension among beneficiaries expecting immediate access.

3. Death‑in‑Service Benefit Clarification

• Exemption extended from active members only to non‑active members.
• Broadens the scope of death‑in‑service benefits that remain outside IHT.

Practical Implications for Families and Personal Representatives

Increased Administrative Burden

Families may face:

• More complex estate administration.
• Additional valuations and forms.
• Delays in accessing inherited pension funds.
• Potential disputes where beneficiaries receive less than expected.

Risk of Family Conflict

• Up to half of the pension may be withheld for over a year.
• Beneficiaries may receive reduced amounts after IHT is settled.
• Likely flashpoints: siblings, stepfamilies, blended families, non‑spouse beneficiaries.

Summary

What is changing?

• From April 2027, unused pension funds become subject to inheritance tax.

Why is this significant?

• It overturns a decade‑long assumption that pensions sit outside the taxable estate.

Who is affected?

• Beneficiaries of pension death benefits.
• Personal representatives administering estates.
• Advisers managing client retirement and estate strategies.

What new powers do PRs have?

• Ability to retain up to 50% of inherited pensions for up to 15 months to cover IHT.

What risks arise?

• Delays in payments.
• Increased paperwork.
• Potential family disputes.
• Reduced effectiveness of pension‑based IHT planning.

FAQs

Will inherited pensions be subject to IHT from 2027?

Yes.  From April 2027, unused pension funds will be included in the taxable estate and may face up to 40% inheritance tax.

Why is the government making this change?

The Finance (No.  2) Bill brings pensions into line with other estate assets and closes a long‑standing tax advantage.

Can personal representatives delay pension payments?

Yes.  PRs can hold back up to 50% of the pension for up to 15 months to ensure IHT can be settled.

Will beneficiaries receive less than expected?

Potentially.  If IHT is due, the final amount paid to non‑exempt beneficiaries may be reduced.

Are death‑in‑service benefits still exempt?

Yes, and the exemption has been widened to include non‑active members.

How Can We Help You ... 

Estate Planning Strategies Must Be Revisited

• Reassess the role of pensions in IHT mitigation.
• Reconsider withdrawal sequencing across pensions, ISAs, and taxable assets.
• Update previous assumptions about “pensions as the last pot to touch”.

Not Much Time Left ...

• You may only have one annual review left before April 2027.

Support for Bereaved Families

• We can help you with
  • Administrative delays.
  • Prepare executors for this expanded responsibility.
  • Help with cash‑flow needs for settling IHT.
  • Reduce the risk of disputes among beneficiaries.

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