From April 2027, inherited pensions will be subject to Inheritance Tax and included in the ‘estate’ of someone who has died – here is what you need to know
Grieving families may be forced to pay inheritance tax on pensions from April 2027 after a major shake-up was confirmed this week.
Under current rules, if you die before the age of 75, the person inheriting your pension will not have to pay tax on your retirement savings.
If you die after the age of 75, those who inherit your pension will pay Income Tax when they draw from it, as it will be treated as income.
But from April 2027, inherited pensions will be subject to Inheritance Tax and included in the “estate” of someone who has died. It is important to remember that not everyone is subject to Inheritance Tax – scroll down to see if you would be liable.
The plans were first announced in the autumn 2024 Budget – but now, the Government has published draft legislation, outlining the changes.
It confirms that the person receiving the inherited pension will be responsible for reporting and paying any Inheritance Tax due, as opposed to it being the responsibility of the pension provider.
It also confirmed that death in service payments will not become liable for Inheritance Tax. HMRC estimates that about 10,500 estates in 2027/28 will have to pay Inheritance Tax in the 2029/30 financial year while 38,500 will face a larger bill.
Steve Webb, partner at pension consultants LCP said: “Life is tough enough when you have just lost a loved one without having extra layers of bureaucracy on top.
“In future, the person dealing with the estate will need to track down all of the pensions held by the deceased which may have any balances in them, contact the schemes, collate all the information and put it into an online calculator and then work out and pay the Inheritance Tax bill.
“All of this has to be done before a probate application can be made, potentially substantially slowing down the process of winding up an estate.
“Complications will no doubt arise where the family member cannot track down all of the deceased persons pensions or where providers are slow to supply the information needed to work out the IHT bill.“
What is Inheritance Tax?
Inheritance Tax is sometimes paid on the “estate” of someone that has died – this includes property, possessions and money. But under the current rules, very few people end up paying it.
Inheritance Tax is only due for wealth transferred within seven years of death. If there is Inheritance Tax to pay, the standard rate you pay is 40% above anything above threshold, which is normally £325,000 – although this is often higher depending on who you leave your estate to.
For example, there is no Inheritance Tax to pay when an estate is left to your spouse or civil partner. If you give away your home to your children – this includes adopted, foster or stepchildren – or grandchildren, then the Inheritance Tax threshold can increase to £500,000.
This includes the basic £325,000 allowance, plus an additional £175,000. If you are married or in a civil partnership, any Inheritance Tax allowance that isn’t used can be passed on when someone dies.
This means a couple can potentially pass on as much as £1million without their estate being subject to Inheritance Tax. There are also ways to reduce how much Inheritance Tax is paid on your estate. Your rate of Inheritance Tax on some assets is reduced from 40% to 36% if you leave at least 10% of the net value after any deductions to a charity in your will.