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IHT charge on unused pension benefits

From 6 April 2027, inheritance tax will be payable where someone’s estate at death includes unused pension funds or death benefits. The measure was announced at the time of the Autumn 2024 Budget. It will increase the inheritance tax payable on an estate which includes unused pension benefits where the estate is not sheltered in full by the nil rate bands or by exemptions. Government estimates suggest that of the 213,000 estates with inheritable pension wealth, around 10,500 estates would have a liability to inheritance tax where previously they would not and 38,500 estates would pay more inheritance tax as a result of this measure.

Background

The Government is of the view that pension schemes are increasingly being used as a vehicle to transfer wealth free of inheritance tax rather than simply to save for retirement. This concern was heightened after the removal of the lifetime allowance. Individuals are able to build up unlimited tax-free savings in their pension, while funding their retirement in other ways and passing on their pension pots to their beneficiaries free of inheritance tax.

The inheritance tax treatment of pension schemes is not the same across the board. Non-discretionary schemes, such as the NHS and judicial pension schemes, are treated as part of an individual’s estate for inheritance tax purposes. However, where the scheme is a discretionary scheme, as is the case for most UK pension schemes, unused pension funds can currently be passed on after death free of inheritance tax.

New rules from April 2027

From 6 April 2027, unused pension funds and death benefits will be included in an individual’s estate on their death, regardless of whether the pension scheme administers or scheme trustees have any discretion over the payment of any death benefits.

However, death in service benefits payable from both discretionary and non-discretionary registered pension schemes will remain free of inheritance tax.

The inter-spouse exemption (which applies when an estate is passed to a surviving spouse or civil partner) applies equally to unused pension benefits, as does the exemption for gifts to charities.

Administration

Personal representatives will be responsible for reporting and paying the inheritance tax due. This is a change from the original proposal under which the burden would have fallen under scheme administrators and was made in light of responses received to a consultation on the issue.

02/09/2025