HMRC has released a crucial technical note regarding pensions and Inheritance Tax (IHT), confirming a major change that will take effect on April 6, 2027. Under the new rules, leftover private pension pots must be included in the total value of your estate, making them subject to the standard 40% IHT rate.
Previously, unused pension funds were typically passed to beneficiaries free of tax. Penny Cogher, pensions partner at Irwin Mitchell, commented: "HMRC's technical note is an important step forward for the new IHT pensions regime, but it does demonstrate how technically demanding pension related inheritance tax will be in practice."
Cogher added: "Pension scheme administrators will be looking for scheme members to take more upfront responsibility with their pension savings in this regard and for all ages of scheme members to have clear, up to date, expression of wishes forms lodged online with the pension providers so, on being notified of a death, the pension providers can rapidly assess the position and make a decision as to who should receive the pension benefits."
She also noted: "If the pension benefits are to be paid to the spouse, then importantly, even under the new regime, no IHT is payable on those pension benefits, due to the usual spouse exemption from IHT."
Interaction with Charitable Giving
Naomi Neville, a partner at Irwin Mitchell Private Client Advisory, highlighted the interaction with charitable giving and the reduced inheritance tax rate. "The HMRC technical note confirms that pension assets are taken into account, with the deceased's free estate, when assessing eligibility for the reduced 36% inheritance tax rate where 10% of an estate is left to charity," she said.
Professional bodies have requested that a separate component for pensions be created to keep the free estate separate. Neville warned: "For families, this increases the risk that existing plans fall short unintentionally, leading to higher tax bills and difficult conversations after death."
She added: "Executors are being asked to gather, value and share information that can be difficult to access, at a time when clarity and reassurance matter most. The real risk for families is delay, uncertainty and outcomes that differ from what they reasonably expected when estate plans were put in place."
