IHT treatment of unused pension funds and death benefits

The 2027 reforms will shift more responsibility to personal representatives, who may need to manage withholding arrangements and settle any IHT before pension benefits are released.

From 6 April 2027, most unused pension funds and death benefits will be included in IHT, meaning that more pension assets could be taxed when someone dies. This is a major change from the current rules, which largely exclude these funds from IHT.

Individuals with significant pension savings should review their estate plans carefully. Under the new rules, beneficiaries could face an IHT charge on inherited pension funds. Responsibility for reporting and paying this tax will fall on personal representatives, not the pension scheme administrators.

There are some important exceptions. Death-in-service benefits from registered pension schemes and dependants’ pensions from defined benefit or collective money purchase schemes will continue to be exempt from IHT.

It was announced as part of the Budget 2025 measures that from 6 April 2027, if a deceased person’s estate is expected to owe IHT, their personal representatives can instruct the pension provider to withhold 50% of taxable pension‑death benefits for up to 15 months. They must then pay any IHT due to the tax authorities before releasing the rest to beneficiaries. This does not apply to exempt benefits, small pots (under £1,000) or ongoing annuities. Personal representatives will also be discharged from liability for pensions discovered after they have received clearance from HMRC. 

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