HM Revenue & Customs (HMRC) has announced significant changes to the taxation of pensions when a person dies after reaching age 75. Effective from 6 April 2027, the majority of unused pension funds and pension death benefits will be treated as part of the deceased’s estate for Inheritance Tax (IHT) purposes.
This reform addresses long-standing concerns about pension schemes being exploited as tax avoidance tools to transfer wealth, rather than fulfilling their primary purpose of funding retirement. The change also harmonizes the inconsistent IHT treatment previously applied to different pension types, promoting fairness and clarity.
Under the new rules, if a pension scheme member dies before 6 April 2027, the existing tax treatment will continue to apply—even if pension benefits are paid to beneficiaries after that date. However, for deaths on or after this date, unused pension assets will be factored into the estate for IHT calculations.
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A comprehensive technical note from HMRC explains how to identify, value, and allocate these notional pension assets to beneficiaries, as well as outlining the responsibilities for reporting and paying any tax due. It also details the mechanisms of withholding notices and the pensions direct payment scheme, and clarifies how these changes interact with current Income Tax rules related to pension death benefits.
These measures aim to prevent the use of pension schemes as vehicles for tax-free wealth transfers, ensuring that tax liabilities are correctly applied. The reforms establish a consistent tax treatment across all pension types, reinforcing pensions’ intended role as retirement savings.
Additionally, the guidance addresses situations where new pension-related assets are discovered after HMRC has already issued a clearance certificate for an estate. In such cases, personal representatives must inform HMRC but won’t be personally liable for additional tax. Instead, HMRC will handle the calculation and collection of any extra tax owed through standard procedures.