UK Pensions and Inheritance Tax (IHT): Revised Policy from HMRC

HMRC has taken on board concerns from the pensions industry about its previous proposals for bringing many pension death benefits within the scope of inheritance tax (IHT).

On 21 July 2025, HMRC issued a Policy Paper and draft legislation, plus a Summary of responses to its consultation in October 2024.

In a nutshell

In a welcome development, HMRC has changed both the proposed:

• Scope of the reforms: in particular, by excluding death-in-service benefits from an individual’s estate for IHT; and
• Process: by placing most of the responsibility for calculating, reporting and paying IHT on personal representatives (PRs) instead of pension scheme administrators (PSAs).

Background: reminder

The Chancellor announced in October 2024 that IHT would be extended to many death benefits from pension schemes.

The announcement, and subsequent workshops with HMRC, led to concern both about the scope of the changes and the new processes involved in calculating, reporting and paying IHT.

Where a member's estate is less than the IHT nil-rate allowance of £325,000, no IHT is payable. (Where the member leaves their home to a direct descendant, the higher residence nil-rate band (an additional £175,000) may also be available.)

The standard rate of IHT at 40% is payable on the value of the taxable estate over the available nil-rate band. No IHT is due on assets left to exempt beneficiaries (the member's spouse, civil partner or a charity).

Scope: Where are we now?

For deaths on and after 6 April 2027, a death benefit from a registered pension scheme will be part of the member’s estate for IHT purposes if the benefit is a “relevant death benefit”.

What is a “relevant death benefit”?

The following benefits will be “relevant death benefits” (and will be part of the member’s IHT estate):

• Pension death benefits (including survivors’ flexible drawdown arrangements and annuities (other than the survivor’s part of a joint life annuity));
• Lump sum death benefits (including uncrystallised funds lump sum death benefits and drawdown lump sum death benefits);
• Payments under a guarantee (for example, a five year guarantee from a defined benefit (DB) pension); and
• Unauthorised payments from the member’s arrangements.

What is not within the member’s IHT estate?

The following benefits will not count as part of the member’s IHT estate:

• Dependant’s scheme pensions;
• Survivor’s benefits from joint life annuities;
• Trivial commutation death benefit lump sums, to the extent that the lump sum represents a dependant’s scheme pension which would otherwise have been payable to the survivor; and
• “Death-in-service benefits”.

What is a “death-in-service benefit” for IHT purposes?

The draft legislation provides that a lump sum death benefit will be a “death-in-service benefit” (DIS benefit), and so fall outside the member’s IHT estate, if it meets the following conditions:

• It is a lump sum death benefit payable under the terms of a registered pension scheme (or a qualifying overseas scheme); and
• It is only payable if, immediately before death, the member was both:

o An active member of the scheme; and

o In employment of a description specified in the scheme rules.

Definition of “death-in-service benefit”: further explanation needed

Our expectation is that the DIS benefit exclusion is intended to apply only to life insurance-type death in service benefits (such as a lump sum of a multiple of salary at death).

However, the current drafting could also include a lump sum from an uncrystallised defined contribution (DC) pot from an occupational scheme if the individual was an active member of the scheme at death. We anticipate that this potential loophole may be closed following consultation.

The draft definition may also not cover all the benefits intended, for example:

• The requirement for the member to have been in “employment” may exclude death benefits for the self-employed, or for partners in a business; and
• It is not clear whether a member of a life cover only scheme will be considered an “active member” for this purpose.

We hope that these issues will be clarified following consultation.

Discretionary or non-discretionary lump sums

At present, where pension scheme trustees have discretion to decide who should receive a lump sum death benefit (with the member being able to express a wish but not to bind the trustees), the lump sum death benefit is held on “discretionary trust” and does not form part of the member’s estate for IHT purposes.

Non-discretionary death in service lump sums are common in public sector schemes and are currently taxable for IHT purposes.

In a positive move for public sector workers, HMRC has confirmed that under the new regime all DIS benefits from registered schemes will be outside the member’s IHT estate, regardless of whether they are paid under a discretion or not.

Process for identifying and paying IHT due

HMRC has set out in broad terms how it expects PRs, PSAs and beneficiaries to interact with each other and with HMRC where a pension death benefit is payable.

Our current understanding of the roles of the different parties is set out below.

PRs’ responsibilities will include:

• Identifying any pension schemes of which the deceased was a member;
• Informing the PSA of the death and whether there is a surviving spouse or civil partner (who would be an exempt beneficiary for IHT purposes);
• Assessing the value of the estate, including the values of pension death benefit provided by the PSA, and assessing whether IHT is due;
• Apportioning the IHT nil rate band and any IHT due between the pension benefit and the remaining estate;
• Informing the PSA whether or not IHT is payable on the estate;
• Filing form IHT400 where required and paying IHT due;
• If the PRs have paid IHT due on the pension benefit (please see below), reclaiming that IHT from the pension beneficiaries;
• Managing any amendments to the estate and liaising with the pension beneficiaries and the PSA as needed about changes to IHT payable; and
• Using details provided by the PSA, determining whether the member’s lump sum and death benefit allowance (LSDBA) has been exceeded.

PSA’s responsibilities will include:

• Informing the PRs of the value of any pension death benefit, as at the date of death, within four weeks of being notified of the death by the PRs;
• Determining who is to receive the pension death benefit (including following the exercise of discretion), in the same way as at present;
• Notifying the PRs how the benefit will be divided (if applicable) between exempt and non-exempt pension beneficiaries;
• Providing a generic explanation to non-exempt pension beneficiaries that:

o IHT may be due on the pension death benefit;

o The pension beneficiaries and the PRs will be jointly and severally liable for any unpaid IHT due on the pension benefit; and

o The pension beneficiaries may require the PSA to pay the IHT directly from the pension benefit, if certain conditions are met.

• If requested by the beneficiary, paying any IHT due on a pension death benefit which has not already been distributed (payment of IHT in these circumstances will be an authorised payment);
• Paying benefits to beneficiaries and confirming to the PRs that this has been done; and
• Where IHT is due (or an IHT account is required but no IHT is payable), providing beneficiaries’ names and contact details to the PRs.

Beneficiaries’ responsibilities will include:

• Where appropriate, liaising with the PSA and PRs over the method for paying IHT on the pension benefit (please see below);
• Giving notice requiring the PSA to pay IHT on the pension benefit directly to HMRC (if the beneficiary decides to use the new “scheme pays” arrangement); and
• Reclaiming any overpaid income tax from HMRC (which may arise if IHT on the pension benefit is paid by the PRs or directly by the beneficiary, and the beneficiary is paid the pension benefit net of income tax).

Ways of paying IHT on pension benefits

Following concerns about liquidity and cashflow when paying IHT on relevant death benefits, HMRC has proposed three options for payment, explained below.

HMRC has commented that the PRs' liability is limited to the value of assets which pass directly through the estate. Where none of the methods below are possible for paying the IHT on the relevant death benefit, the PRs should speak to HMRC.

PRs pay the IHT from the deceased’s free estate

• If there are sufficient liquid assets in the PRs’ hands, the PRs may choose to pay the IHT on any relevant death benefits themselves. If the pension beneficiaries are different to the beneficiaries of the wider estate, the PR should then reclaim the IHT on the relevant death benefit from the pension beneficiaries.
• This method may be particularly helpful where assets in the pension scheme are illiquid. HMRC estimates that in 2027/28, of IHT-paying estates with relevant death benefits caught by the reforms, the relevant death benefit will be less than 60% of the net value of the estate in almost all cases, and less than 5% of the net value of the estate in more than half of cases.
• If income tax must be deducted on the relevant death benefit (which will apply for some benefits on death after age 75), the pension beneficiary may reclaim income tax on the amount of IHT paid in respect of the relevant death benefit.

Pension beneficiaries pay the IHT

• The pension beneficiaries may take the relevant death benefit in full and pay any IHT direct to HMRC.
• The pension beneficiaries may reclaim any income tax paid on the relevant death benefit which was subsequently used to pay IHT.

PSA pays IHT under a “scheme pays” arrangement

• The pension beneficiaries may give notice requiring the PSA to pay IHT due on the relevant death benefit (unless it has already been paid out).
• PSAs who receive a valid notice must pay the IHT due if it is £4,000 or more, and may choose to pay IHT of less than £4,000.
• The PSA must pay the IHT specified within three weeks of receiving the notice. (The three week period seems very short and may cause difficulties with PSA’s systems, especially where assets held by the scheme are illiquid.)
• If the PSA does not pay the IHT in the notice within the three week period, the PSA will become liable for the IHT.

Information sharing

• HMRC recognises that changes will be needed to information sharing regulations, to enable information to be exchanged between the parties as needed.
• HMRC also intends to publish guidance to accompany the legislation.

Disclosure of beneficiaries’ identities

• HMRC’s proposed process would require the PSA to let the PRs know the pension beneficiaries’ personal details (including name, address, date of birth and National Insurance number) where an IHT account must be created with HMRC. In strained family situations such disclosure may be contrary to beneficiaries’ wishes and could put individuals at risk.
• We must hope that HMRC will provide an alternative process to enable beneficiaries’ identities and contact information to remain confidential where appropriate.

Next steps

For the government

• Consultation on the draft primary legislation (which covers the scope of the new measures and provides for IHT to apply) ends on 15 September 2025. These provisions will be included in the Finance Bill 2025-26.
• HMRC will continue to work with industry representatives to develop and refine the process for assessing, reporting and paying IHT on relevant death benefits. HMRC plans to issue guidance before the changes have effect on 6 April 2027.
• Draft provisions to amend the information sharing regulations will be issued for consultation in due course.

For pension schemes (and employers)

• Await further clarification from HMRC on the exact scope of the death-in-service exemption. Consider whether any amendments are needed to death in service provision to ensure that insurance-type lump sums fall outside the scope of IHT.
• Update post-death communications and processes in due course, to reflect future guidance from HMRC and amendments to the information sharing regulations.
• When there is greater clarity about the scope and practicalities surrounding the IHT changes, consider whether redesigning death benefits provided from pension schemes, in particular by removing trustee discretion, would ease administration and better meet the employer’s objectives.

For individuals

• Individuals whose financial planning is affected by the extension of IHT to relevant death benefits may wish to discuss their situation with an independent financial adviser (IFA).

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