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At Cangaf Ltd, we help individuals and businesses stay informed about important UK tax changes. There are major HMRC inheritance tax changes in 2027.Starting in April 2027, the UK pension inheritance tax is poised for pivotal, dramatic changes. If pensions are a part of your estate planning strategy, you need to be well aware of these reforms. Keep reading as we cover the changes, how they will affect you, and tips for handling them.
For more information and support, you can contact our team for an appointment.
What is the UK Pensions Inheritance Tax?
At present, lump sum death benefits and unused pension funds are not taken as part of an individual’s estate. This is why pensions are considered an effective wealth transfer tool. This is now set to change. Currently, you are required to pay approximately 40% inheritance tax on estates (over and above £325,000 or the standard nil-rate band).
Key Changes in Pension Inheritance Tax From 6 April 2027 Onwards
The new inheritance tax on pensions was designed by the UK government for a just taxation system. In the past, most pension-related pots were not considered a part of IHT or Inheritance Tax. However, during the Autumn Budget 2024, it was declared that from 6 April 2027, things will change. From this date onwards, a major part of your death benefits and unused pension funds will be added to the value of your estate.
As per estimates from the government, in 2027-28, there would be approximately 213,000 estates with an inheritable pension. Of these, around 10,500 estates or 1.5% of the total estimated deaths in the UK will be liable to pay Inheritance Tax.
UK Pension Inheritance Tax Reforms
Key Points
- Unused pension death benefits and funds will be a part of the estate. This is irrespective of discretionary/non-discretionary payments.
- What is not affected? Defined pension benefits, like final salary pensions.
- Death-in-service benefits are excluded from estate valuations.
- 40% pensions and inheritance tax will be charged on pensions if the estate’s total size exceeds the IHT threshold.
- There will be Income Tax applicable on the balance benefits if the actual pension holder passes away at 75+ years of age.
Note – Current IHT rules exempting transfers to a surviving spouse, civil partner, or registered charity from inheritance tax will continue to apply.
Preparing For Pension Inheritance Tax Changes
1. In the case of estate planning for individuals
- For inheritance tax optimisation and legacy planning, it is best to use ISA investments, Whole-of-Life insurance policies, or spend the pension while you are alive.
- Ensure that your estate plans and wills are up-to-date as per these inheritance tax pension changes. Also, consider using direct gifting or the use of trusts.
2. In the case of personal representatives & executors
- Focus on creating estate summaries along with details of pension providers
- Support beneficiaries in recovering overpaid income tax, if applicable
- Account for income tax on inherited pension payments
- In case beneficiaries are unmarried and aged 75 years or above, start managing the dual tax regime consisting of pension death tax and income tax.
3. In the case of pension scheme administrators
- Strengthen internal processes for timely responses to PR enquiries
- Work with various industry verticals so that HMRC’s upcoming tools and guidance can be further shaped
Role of Personal Representatives In The Gamut Of Inheritance Tax Changes
One of the major differences between pre and post 6 April, 2027 is –
- In the pre-2027 era, since benefits were not a part of the estate, pension scheme trustees took care of reporting.
- In post 2027, personal representatives have the responsibility of reporting unused funds from pension and death benefits. They also need to pay the new outstanding tax on pensions and need to work hand-in-hand with pension scheme administrators.
Why are personal representatives responsible for reporting new pension tax?
The initial idea was for PSAs or pension scheme administrators to report and pay the pension Inheritance Tax for the estate. But this would come with a few practical challenges. For example, PSAs may not have beneficiaries or PR contact details. Or, they would not have the right valuation details of the total assets and liabilities of the estate. Or, they may not have exact information about a member’s passing away.
Therefore, PRs who are usually the Estate Administrators or Executors were made responsible for payments and reporting pensions, IHT 2027.
What are the payment options?
When PRs pay Inheritance Tax from the estate
- If the inheritance of the estate and the pension passes onto the same people, they receive the entire pension.
- In case the beneficiaries of the estate and the pension are different, a percentage of the IHT will be claimed from the pension beneficiaries by the PR.
When pension beneficiaries pay Inheritance Tax directly
- IHT can be settled by beneficiaries with HMRC if they receive funds from the pension directly.
Pension Providers are instructed to deduct Inheritance Tax
- In such cases, pension providers deduct IHT on pensions before the pension is released.
What will be the deadline to pay the taxes?
Inheritance Tax must be paid within 6 months of the death of the pension and estate holder. Further instructions are awaited. There are plans for HMRC to update PRs, PSAs, and beneficiaries with further guidance on data exchange. There are talks of developing detailed guidance, process maps, and calculators before the new pension changes in 2027.
Other PR-related powers include –
- They can instruct PSAs for direct payment to HMRC before releasing the pension to beneficiaries. a
- Withholding notice power of PRs, wherein they can instruct PSAs to withhold a certain percentage of the pension. About 50% of the funds can be withheld for about
15 months from the day of passing. This may be required for finalising the IHT details. Consequently, beneficiaries will receive less than 50% funds as per the scheme. This will, however, not apply to the spouse or civil partner of the deceased, or a charity, or a registered club.
- In cases where HMRC issues a clearance certificate for IHT, PRs have no liability for inheritance tax, especially on such pension funds that are uncovered later.
FAQs
1. Is pension taxable twice?
Yes, this is a possibility – a concern raised by many. This is because, with the inheritance tax reforms, 40% IHT will be charged on pension funds as part of your estate. Additionally, if the pension holder passes away at 75+ years, a part will be paid as income tax by the beneficiaries of the inherited pension.
Consequently, the net tax can range between 64% and 67% or maybe even more.
2. Double taxable pension is critical in which scenarios?
It is critical for scenarios like –
- Where pensions are used for wealth planning for intergenerations.
- Higher-rate beneficiaries or citizens paying tax at additional rates.
- Larger pension funds
3. Are there any exceptions for spouses and civil partners under pension tax changes 2027?
Yes. Surviving partners – spouses or civil partners – are fully exempted from IHT. All unused allowances can be transferred without any restrictions. In other words, up to £1 million can be passed to spouses and civil partners tax-free for applicable conditions.
4. Share tips to address inheritance tax pension reforms.
Here are some practical tips –
- Take professional help related to estate planning.
- Revisit the nominee details.
- Life insurance can be considered as it is not considered a part of the estate.
- Have a clear understanding of how IHT will affect your beneficiaries.
- You can leave your pension to charities for tax exemption.
Related guides: Director’s Salary 2026/27: Essential Strategy to Save Tax · What is a Tax Code?
Summary
With the new changes in inheritance tax on pensions introduced in the UK from 2027, be prepared for reworking your tax plans. While in the past, pensions were a tax-efficient wealth inheritance strategy, from 2027, things are set to change. Once the UK pension tax changes come into effect, pensions will get included in your taxable estate valuation attracting inheritance tax. This can, in turn, impact the tax liabilities of your beneficiaries. Don’t panic though as this can be addressed by proactive planning. Need help with inheritance tax planning? We are just a call away
Further reading and official guidance
More guides and tools from our team:
Official guidance from HMRC and GOV.UK:
