Changes to Pensions and Inheritance Tax that personal representatives need to understand

From 6 April 2027, the Inheritance Tax treatment of pensions is due to change materially. Victoria Hill, legal director in our wills, trusts and probate team, looks at what these changes mean to personal representatives and why now is the time to review existing estate planning arrangements.

The proposed reforms

Under the current regime, many unused pension funds and discretionary pension death benefits sit outside a deceased person’s estate for Inheritance Tax purposes.

This has made pensions a significant estate planning asset, particularly where individuals have preserved pension wealth with a view to passing it to the next generation.

The proposed reforms change that. For deaths occurring on or after 6 April 2027, most unused pension funds and pension death benefits are expected to be brought within the value of the deceased’s estate for Inheritance Tax.

In practical terms, the pension will no longer be viewed separately from the estate for tax calculation purposes. Instead, its value will be aggregated with the deceased’s other chargeable assets when determining whether Inheritance Tax is payable and, if so, in what amount.

This may bring more estates within the scope of Inheritance Tax, particularly where the non-pension estate is already close to or above the available nil-rate band and residence nil-rate band.

Families who have assumed that pension wealth will pass outside the estate may therefore need to reassess their succession planning, beneficiary nominations and liquidity position.

New responsibilities

A key feature of the revised approach is that personal representatives, rather than pension scheme administrators, are expected to be responsible for reporting and paying any Inheritance Tax attributable to unused pension funds and death benefits.

This is a significant administrative change. Personal representatives will need to identify the deceased’s pension arrangements, obtain valuations from scheme administrators, incorporate those values into the Inheritance Tax account, calculate the tax position and ensure that the liability is paid to HMRC within the relevant deadlines.

The practical burden should not be underestimated. Pension assets are often held across multiple schemes, and death benefit decisions may be made by trustees or administrators separately from the administration of the estate.

Personal representatives may need to manage timing issues where pension information is required before the estate’s Inheritance Tax position can be finalised. They may also need to consider whether funds should be retained or requested from pension schemes to meet the tax liability.

Planning ahead

The reforms do not mean that every pension will automatically suffer Inheritance Tax. The overall tax result will still depend on the value of the estate, available exemptions and reliefs, the identity of the beneficiaries, and the final form of the legislation and HMRC guidance.

Death benefits passing to a spouse or civil partner should remain protected by the spouse exemption, where the conditions are met. Death-in-service benefits payable from registered pension schemes are also expected to be excluded.

For clients, the message is clear: pension planning and estate planning can no longer be considered in isolation. Wills, pension nominations, lifetime gifting, tax allowances and the likely liquidity of the estate should be reviewed together before April 2027.

For personal representatives, the proposed rules will add a further layer of responsibility to estate administration, making early identification and valuation of pension rights essential.

If you would like to discuss how your pension and wider estate planning could be affected, our wills, trusts and probate team can help. Contact us on 01772 258 321.