The government has published its reply to the many responses made to last October’s consultation paper on bringing pensions within the scope of inheritance tax (IHT).

In last October’s Budget, the Chancellor announced two major changes to Inheritance Tax, both of which were immediately put out to consultation. The first, which takes effect in April 2026, involves a reduction in business and agricultural reliefs, which has attracted considerable media attention – recall the tractors paraded down Whitehall. The second change, to bring pension death benefits within the scope of Inheritance Tax from April 2027, attracted less media interest, even though longer term it will be the more significant revenue raiser.

As Parliament shut up shop for the summer, the Treasury issued its summary of the 649 written responses to last year’s consultation document, alongside draft legislation, providing perfect summer reading for pension followers. The summary of this high number of responses revealed two results:

• The good news is that the Treasury has decided that all death-in-service benefits (typically a lump sum expressed as a multiple of salary, or expression of wish/ life assurance) will be exempt from Inheritance Tax. This will mean that some death benefits currently subject to IHT will not be subject to it from April 2027.
• The bad news is that in all other instances, the proposal to apply Inheritance Tax to pension death benefits remains. However, the government has changed how the Inheritance Tax will be collected.

Who is responsible for declaring Inheritance Tax from Pension Death Benefits?

In last year’s consultation, the government announced that pension scheme administrators would be responsible for reporting and paying any IHT due. Unsurprisingly, the pension industry rebelled against the idea, pointing out that it would drag every pension into the IHT administrative process, despite over 75% of pensions having no IHT liability (gov.uk).

In response, the government has decided that the deceased’s personal representatives, who already administer the non-pension estate, will be liable for reporting and, initially, paying Inheritance Tax on pension death benefits.

The shifting of responsibility raises fresh issues, which the government has attempted to address by giving the personal representatives three options:

1. Pay the Inheritance Tax directly from the estate’s resources.
2. Arrange for the pension beneficiaries to request that the pension scheme administrators pay the Inheritance Tax due.
3. Allow the pension beneficiaries to receive the full pension benefit and then personally settle the accompanying Inheritance Tax bill.

If your beneficiaries could be affected by this extension of the IHT regime, the sooner you start planning for it, the better.

 

Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate tax or will advice.

Article published on the 10th of September 2025.

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