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Unsurprisingly, the Budget did not reverse the forthcoming extension of Inheritance Tax (IHT) to pensions. The reform that was originally announced in 2024 means that from 6 April 2027, most unused pension funds and pension death benefits will still be treated as part of an individual’s estate for IHT purposes, where the pension scheme member dies on or after 6 April 2027.
However, this year’s Budget included two technical, but welcome, amendments intended to make the new rules easier to operate in practice.
Under the first amendment, a prospective personal representative would be able, subject to certain conditions, to require a pension scheme administrator to pay IHT directly to HMRC from the deceased’s pension fund. The existing legislation already provides a direct-payment mechanism for personal representatives and beneficiaries. The amendment would extend this mechanism so that the person who expects to become the personal representative can use it before the grant has been obtained.
The process would begin with the prospective personal representative issuing a withholding notice requiring the pension scheme administrator to withhold up to 50% of each relevant beneficiary’s pension death benefits. They could then issue a payment notice at least 28 days later. The payment notice would have to satisfy the statutory requirements, including a declaration that the sender reasonably believes they have priority to apply for the grant. Subject to the statutory exceptions, the scheme administrator would be required to make payment within 35 days of receiving a valid notice.
This should assist where IHT must be paid before the grant can be obtained, but the person dealing with the estate does not have sufficient funds from the non-pension estate and is not yet formally appointed as personal representative. It enables part of the IHT attributable to the pension property to be paid using funds still held within the pension scheme.
The second amendment concerns estates that include gifts to charity. Currently, leaving at least 10% of your estate to charity can reduce the IHT rate on the taxable part of your estate from 40% to 36%. This relief was introduced to encourage charitable giving and has become an important part of many clients’ estate planning. The forthcoming extension of IHT to pensions has therefore raised concerns that existing charitable gifts may require a significant increase in value to benefit from the relief, exceeding what the testator had intended when making their Will.
The Budget seeks to address this by giving those administering an estate the option to treat pension assets as a separate part, or ‘component’, rather than including them with the estate’s other assets when calculating entitlement to the reduced 36% rate. Details on this have now been published in the Finance Bill 2026/27, which describes how pension assets brought into the estate for IHT purposes would form a separate component when assessing entitlement to the reduced rate, and personal representatives would have the power to elect whether this component should be merged with other estate components. This additional flexibility will hopefully help qualifying estates retain the lower rate while keeping charitable gifts in line with the deceased’s wishes.
What does this mean for you?
The bigger picture remains unchanged: pensions will no longer necessarily provide the IHT shelter that many clients have historically expected them to.
For those with significant pension savings, the approaching 6 April 2027 implementation date therefore provides a useful prompt to revisit their wider estate planning. For some, routinely preserving the pension while spending other assets first may no longer be the obvious approach.
The position may be particularly worth reviewing where:
- unused pensions form a significant proportion of overall family wealth;
- an estate may already be close to or above the available IHT allowances;
- pension wealth could increase the value of the estate above £2 million, triggering or increasing the taper of the residence nil-rate band;
- strategic gifts to charity are included in a Will; or
- existing Wills, pension expressions of wishes and lifetime-gifting arrangements were prepared on the assumption that pension wealth would remain outside the estate for IHT purposes.
There is no one-size-fits-all solution. Decisions about drawing pension benefits, making gifts from funds withdrawn from a pension, or otherwise revising retirement and estate-planning arrangements should be considered as part of a full financial and tax review, and are likely to require advice from a regulated financial adviser.
How can we help?
With the new rules due to take effect from 6 April 2027, now is a good opportunity to review your estate planning rather than waiting until the changes are already in force.
Our Tax, Trusts and Succession team can help clients understand how the forthcoming extension of IHT to pensions may interact with their wider estate, Wills, lifetime gifting and charitable giving, and whether any changes should be considered ahead of April 2027.