From 6 April 2027, most defined contribution pension death benefits will be included in the deceased’s estate for Inheritance Tax (IHT) purposes – a major change announced in the October 2024 budget, and now strengthened following the consultation outcome and draft legislation published in July 2025.1
Where pensions were once IHT-efficient vehicles for wealth transfer, especially before the age of 75, HMRC’s stated aim is to curb their use as a tax planning tool and restore their primary function as retirement savings. With these changes, pensions will largely be treated like other estate assets for IHT, removing the broad protection they once offered, and will require individuals to reassess their wealth planning.
HMRC has now set out draft rules for applying IHT to pensions, with the main points detailed as follows.
The recently published legislation provides greater clarity over which pension benefits will be subject to IHT, and specifically how these benefits will be valued. In practical terms, the value assessed for IHT will be the same amount determined by the scheme as payable to beneficiaries upon death.
A key point of clarification from HMRC is that there will be no reductions for Business Relief, thus closing the door on previous speculation that assets like Alternative Investment Market (AIM) portfolios held within pensions could escape IHT after 2027.
Furthermore, business assets within a pension wrapper will be valued in full, even if they would otherwise qualify for relief outside of a pension (such as a business premises). This adds pressure to review SIPP or SSAS structures where commercial property or trading assets are held. These changes could cause significant strain on the transition of family businesses between generations.
There were concerns around Death in Service schemes being caught by these changes, however HMRC have confirmed that all benefits paid on death in service will be exempt from IHT, regardless of whether they are paid via registered or excepted group life arrangements.2
Additionally, continuing annuity payments to a surviving spouse under a joint life annuity will qualify for the spousal exemption.
Responding to concerns highlighted by the private client advisory industry about the corresponding administrative burden and delays owing to these legislative changes, HMRC has confirmed a four-stage process with a clear handover of responsibility to personal representatives (PRs) (the individuals who are legally entitled to administer the estate after death) – not the pension provider.
Pension providers will have four weeks from notification of death to provide a valuation. Where schemes have discretion, they must confirm how much is paid to exempt (e.g. spouse) and non-exempt beneficiaries.
PRs must collect and aggregate pension values alongside other estate assets to assess whether IHT is due.
If IHT is payable, PRs allocate the correct tax across pension arrangements, inform HMRC and notify both the scheme and beneficiaries of amounts due.
Where benefits are fully exempt (e.g. paid to a spouse or within the nil-rate band), they can be released without delay or probate. Non-exempt benefits will be subject to IHT, and joint and several liability applies between PRs and beneficiaries.
If IHT is payable on non-exempt benefits, there are three options:
This is welcome clarity on what is likely to be an administratively complex process. Reviewing how the tax is paid, and determining the source of payment, are now likely to be key responsibilities of the PRs during the probate process.
One major impact of this legislation is that those with substantial defined contribution pension arrangements may now find that including these assets pushes their estate above the nil-rate band of £325,000, thereby triggering IHT even if their other assets are relatively modest. HMRC estimates that under this new categorisation, 10,500 more estates will now face IHT liability, and 38,500 will pay more than before. The average increase is expected to be £34,000.3
Executors, or personal representatives, will face increased responsibilities, including the need to navigate pension valuations, allocate IHT appropriately and manage complex tax submissions – often dealing with several different schemes – within six months of the individual’s death.
Business owners should tread especially carefully and review any commercial property or trading assets held within SIPPs or SSASs, as these may require restructuring to prevent potential liquidity issues upon death.
Additionally, nomination strategies should be updated: while spousal beneficiaries remain exempt from IHT on continuing annuity payments, passing death benefits to other family members, such as adult children, could now result in a significant tax liability. Prior to April 2027, individuals should ensure that they have reviewed their nominations to maximise potential planning opportunities.
While the rules remain in draft, the direction of travel is clear: the government intends to proceed with full IHT inclusion of pension death benefits, with no Business Relief and limited exceptions.
Reviewing existing nominations, pension values and estate exposure now forms part of wider IHT planning and where relevant, alternatives such as spending pension assets during lifetime, structured gifting or trust planning may now warrant closer consideration.
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