Consultation outcome

Inheritance Tax on pensions: liability, reporting and payment — Summary of responses

Updated 21 July 2025

Executive summary

At Autumn Budget 2024, the government announced that most unused pension funds and death benefits would be included in the value of a person’s estate for Inheritance Tax from 6 April 2027. A technical consultation on the processes required to implement these changes ran from 30 October 2024 to 22 January 2025.

The technical consultation proposed that pension scheme administrators (PSAs), rather than personal representatives (PRs) would become liable for the reporting and payment of any Inheritance Tax on the pension component of an estate. This was to avoid a situation arising where PRs could not access sufficient funds within the estate to pay the Inheritance Tax attributable to the pension, and to prevent an additional Income Tax liability becoming due on the pension funds used to pay Inheritance Tax.

While many respondents and workshop participants were not opposed in principle to bringing pension wealth into scope of Inheritance Tax, most raised significant concerns with the proposal to make PSAs liable for reporting and paying. Although some of these issues were known at the time of announcement, the scale of the impact on PSAs and pensions beneficiaries became fully apparent during the consultation process.

Respondents highlighted that inherited pension wealth in estates with no Inheritance Tax liability (which the government estimates to be more than three quarters of the estimated 213,000 estates annually with inherited pension wealth) would be brought into the Inheritance Tax process unnecessarily under the PSA-led model. Respondents also advised that PSAs would likely make payments on account of the maximum possible amount of Inheritance Tax (40% of the value of any unused funds or death benefits) to avoid late payment interest charges accruing from the 6-month payment deadline. This would likely lead to delays in paying out funds to pension beneficiaries.

In light of the consultation responses, the government has decided not to proceed with this proposed model. Instead, PRs — who are already responsible for administering the rest of the estate — will be liable for reporting and paying Inheritance Tax on any unused pension funds and death benefits from 6 April 2027. This is consistent with the current process for non-discretionary pension schemes, and certain other assets which do not pass directly through the estate but are in scope of Inheritance Tax.

This response document sets out at a high level how the PR-led process will work for a typical estate with inherited pension wealth. However, the government recognises that this will not capture every scenario and that a small number of estates will not have sufficient liquid funds within the wider estate to pay the Inheritance Tax due on the pension component of the estate. This document sets out steps which the government will take to address this. HMRC will continue to work with industry experts to develop and refine the PR-led process, and will publish further guidance tools and process maps to support PRs, PSAs and beneficiaries ahead of implementation in April 2027.

This response document also clarifies several points about the scope of the reforms, including its application to death in service benefits. Respondents highlighted that the scope set out in the technical consultation would lead to inconsistencies in the treatment of death in service benefits held in registered pension schemes (which would be in scope of Inheritance Tax) and those held in non-pension trust structures (which would be unaffected by these changes). The government accepts these points and agrees that bringing death in service benefits into scope of Inheritance Tax would not be consistent with the broader rationale of ending the use of pensions as a tax planning vehicle. From 6 April 2027 all death in service benefits payable from registered pension schemes will be out of scope of Inheritance Tax, regardless of whether the scheme is discretionary or non-discretionary.

Introduction

At Autumn Budget 2024, the government announced several measures to reform Inheritance Tax and deliver a fairer and less economically distortive tax treatment of inherited wealth and assets. This included making most unused pension funds and death benefits subject to Inheritance Tax from 6 April 2027, aligning their tax treatment with other types of inherited assets and removing the incentive to use pensions as a tax-planning vehicle for wealth transfer after death.

Most estates will continue to have no Inheritance Tax liability following these changes. The government estimates that, out of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 estates — or around 1.5% of total UK deaths — will become liable for Inheritance Tax where this would not previously have been the case. Around 38,500 estates will pay more Inheritance Tax than would previously have been the case. These figures do not take into account potential behavioural changes following the announcement of this measure, and as such should be viewed as an upper limit.

The government has now concluded the technical consultation on the process for reporting and paying Inheritance Tax on unused pension funds and death benefits, which ran from 30 October 2024 to 22 January 2025. The government has also published draft legislation for the changes alongside this response document.

The consultation received 649 written responses in total. Respondents included pension scheme administrators, trustees, tax professionals, lawyers, and individual members of the public. HMRC officials also held 9 workshops with pensions and tax professionals and representative bodies during the consultation period.

A full list of the organisations which submitted consultation responses is included at Annex D. Microsoft Copilot was employed to assist in analysing and categorising the feedback received.

Summary of responses

Consultation questions

Question 1: Do you agree that PSAs should only be required to report unused pension funds or death benefits of scheme members to HMRC when there is an Inheritance Tax liability on those funds or death benefits?

Most respondents agreed that, in principle, PSAs should only report unused pension funds or death benefits to HMRC when there is an Inheritance Tax liability, and that additional reporting and administrative requirements should be minimised as far as possible if no tax is due. However, many respondents doubted that this would be possible in practice. Respondents noted that PSAs would need to exchange information with PRs to establish whether any unused pension funds or death benefits were subject to Inheritance Tax to begin with. Most estates with pension wealth would therefore still be subject to additional administrative processes and potentially costs, regardless of how small the remaining pension funds or death benefits might be.

Responses from pensions industry representatives also noted that PSAs would be heavily reliant on the accuracy of the information provided by PRs to establish any tax liability, and questioned whether PSAs would be penalised if it subsequently transpired that an Inheritance Tax liability existed when the PR had originally advised that it did not (for example, if additional pension pots belonging to the deceased were identified, or if there were other changes to the value of the free estate).

Question 2: How are PSAs likely to respond if they have not received all the relevant information from the PR to pay any Inheritance Tax due on a pension by the 6-month payment deadline?

A significant number of respondents advised that, if the Inheritance Tax position remained unclear at the 6-month mark, PSAs would make payments on account of 40% of the value of the remaining pension funds directly to HMRC to avoid incurring any late payment interest charges. HMRC and PRs would then be required to calculate and administer any repayments accordingly.

Some respondents from the pensions industry also suggested that PSAs would not make any payments to beneficiaries until they had final confirmation of the Inheritance Tax position.

Some respondents also suggested that, if late payment interest charges did arise, then PSAs would deduct these from the remaining pension funds before these are paid to beneficiaries.

Question 3: What action, if any, could government take to ensure that PSAs can fulfil their Inheritance Tax liabilities before the Inheritance Tax payment deadline while also meeting their separate obligations to beneficiaries?

The most common response to this question was that the 6-month deadline for payment of Inheritance Tax should be extended for estates with a pension component. Of those who thought this deadline should be extended, 12 months or 2 years (to align with the 2-year rule for payment of pension benefits tax-free) were the most suggested alternatives. Several responses also suggested that the ‘clock’ for payment of Inheritance Tax by PSAs should start from the date that a PSA is notified of the death of a member, rather than from the date of death.

Respondents generally felt that it would be very challenging for PSAs to meet their existing obligations and report and pay Inheritance Tax within 6 months of a member’s death. They noted that it can already take several months for PSAs to be notified of a member’s death and to establish contact with PRs. Under the discretionary process, pension scheme trustees are legally required to make reasonable enquiries as to potential beneficiaries and gather all necessary evidence before determining which benefits are to be paid to each potential beneficiary. This process can take several months after the PSA is first notified of the death, and a year or more in complex cases.

Respondents highlighted the need for clear obligations and deadlines on both PSAs and PRs for exchanging information, and for comprehensive guidance, tools, and training. A minority of responses suggested that there should be new statutory duties on PRs or PSAs (or both) to ensure that relevant information was provided within a particular timeframe.

Respondents also suggested a range of further measures to simplify reporting and facilitate the exchange of information between PSAs, PRs and HMRC. Several respondents advocated introducing a de-minimis level for reporting pension funds for Inheritance Tax purposes, to reduce administrative burdens on smaller pension pots. Other suggestions included better use of digital platforms and real-time information-sharing, including through the Pensions Dashboard, simplifying the process for paying pension benefits directly to a spouse or civil partner, and extending the use of the ‘Tell Us Once’ service to report deaths to all pension schemes..

Question 4: Do you have any views on PSAs reporting and paying Inheritance Tax and late payment interest charges via the Accounting for Tax return?

Most respondents did not offer a view on this question. Of those who did respond, some were supportive of continuing to use existing systems with which PSAs are already registered. Others highlighted potential administrative difficulties with using the Accounting for Tax return and recommended exploring a different payment mechanism.

The most frequently raised concern was that the requirement for Accounting for Tax returns to be submitted within 45 days of the end of the relevant quarter could mean that PSAs are unable to pay the Inheritance Tax due within the 6-month deadline, leading to a late payment interest charge. Some respondents suggested moving Accounting for Tax reporting to a more frequent cycle — for example, monthly — to accommodate Inheritance Tax payments.

Question 5: Do you agree that 12 months after end of the month in which the member died is the appropriate point for their beneficiaries to become jointly and severally liable for the payment of Inheritance Tax?

A small number of respondents supported making PSAs and beneficiaries jointly and severally liable at the 12-month point.

Other respondents felt strongly that liability should sit with the person most able to pay the liability typically by ‘following the assets’, with beneficiaries becoming either wholly liable or jointly and severally liable for Inheritance Tax from the point at which their pension benefits are paid out by the PSA, rather than at 12 months or another set point in time. Respondents noted that, after pension benefits are paid out, PSAs would not hold any funds to pay additional Inheritance Tax which might become due if amendments to the estate are required.

Question 6: What is the most appropriate means of identifying or contacting beneficiaries if either the PR or HMRC realises that an amendment is needed after Inheritance Tax has been paid? Should PSAs be required to retain the details of beneficiaries for a certain period?

Respondents who favoured the PR retaining beneficiaries’ details and managing any amendments after Inheritance Tax has been paid noted that the PR has a more comprehensive oversight and knowledge of the entire estate than PSAs and that, while PSAs already have certain obligations to retain beneficiaries’ details, there is no obligation to keep these up to date after benefits have been paid out in their entirety.

Other respondents agreed that PSAs should retain up-to-date details of beneficiaries for a period after all pension benefits had been paid out, though views differed on how long this should be, with suggestions ranging from 5 to 10 years.

Respondents also noted that legislative provision may be needed to ensure that PSAs could share beneficiaries’ details with PRs and HMRC without breaching the UK General Data Protection Regulation (GDPR) provisions.

Question 7: What are your views on the process and information sharing requirements set out above?

Many respondents felt that the process and information sharing requirements for PRs and PSAs would lead to increased complexity, delays, and poorer outcomes for pension beneficiaries. Respondents expressed concerns that these requirements would create additional burdens for estates and pension pots with no Inheritance Tax liability, that it would be very challenging for PSAs and PRs to exchange all relevant information and pay any tax due by the 6-month payment deadline, and that this would ultimately lead to delays in paying out funds to pension beneficiaries.

Several respondents queried how the exchange of personal information between PSAs and PRs would fit with GDPR and other regulatory requirements, particularly where this concerned information about vulnerable beneficiaries. They asked for this to be addressed clearly in legislation and guidance.

Question 8: Are there any scenarios which would not fit neatly into the typical process outlined above in the consultation document? How might we address these?

Many responses to this question repeated points made under previous questions. In particular, respondents noted that:

• it is not uncommon for PSAs to be notified of a death several months after it occurs
• PSAs may have no contact details for PRs or beneficiaries
• PSAs or PRs may be difficult to contact or slow to respond
• PRs may be unaware of or unable to trace multiple pension pots acquired by an individual during their lifetime, potentially with different beneficiaries
• the complexity of trustees’ discretionary processes may cause delays
• there may be sensitivities in sharing personal information about vulnerable beneficiaries

Other atypical scenarios highlighted by respondents included:

• intestacy: if a scheme member dies without a will, it can be difficult to identify whether there are PRs and beneficiaries for the estate. There is a risk that PSAs will never obtain the relevant information for these estates and that the Inheritance Tax position will never be clarified. For low-value intestate estates with no Inheritance Tax liability, this may result in PSAs overpaying Inheritance Tax through payments on account which are never reclaimed

• disputed discretionary process outcomes: if there is a dispute between family members or other potential beneficiaries in deciding pension beneficiaries then it may take longer for PSAs to confirm the beneficiaries for Inheritance Tax purposes, particularly if the dispute results in legal action or a complaint to the Pensions Ombudsman

• illiquid assets: pension schemes which have made significant investments into illiquid assets — for example, Self-Invested Personal Pensions (SIPP) and Small Self-Administered Scheme pensions (SSAS) — may face difficulties raising liquid assets to pay the Inheritance Tax liability. There may also be costs and administrative burdens associated with valuing these assets at the date of death

• pension scheme, beneficiaries or PRs are based overseas: estates and pension schemes with an overseas component typically take longer to share and validate information

Question 9: Do you have any other views on the proposal to make PSAs liable for reporting details of unused pension funds and death benefits directly to HMRC and paying any Inheritance Tax due on those benefits? Are there any feasible alternatives to this model?

Responses to this question included wide-ranging suggestions for changes to the PSA-led process. Some of these have been covered under previous questions, including extending payment deadlines, and setting clear obligations and deadlines on PSAs and PRs for exchanging information.

Other suggestions included a good-faith exemption for situations where PSAs are unable to obtain information from PRs despite reasonable efforts; extending the Direct Payment Scheme to PSAs (a scheme which allows PRs to instruct payment of Inheritance Tax directly from, for example, the deceased’s bank and building society accounts); sunsetting the PSA’s liability; taxing any new assets discovered after the initial Inheritance Tax payment at 40% so that the nil-rate band would not have to be reapportioned; introducing a separate pensions nil-rate band to remove the need to apportion between different elements of the estate; and allowing PRs to pay Inheritance Tax due on the pension from other liquid funds in the free estate and be reimbursed by the PSA or pension beneficiary.

Some respondents to this question (and to the other questions above) suggested amendments to the design of the PSA-led process for reporting and payment and entirely alternative policies outside the scope of the technical consultation. The following were suggested by more than one respondent:

• PRs assume liability for reporting and paying Inheritance Tax on pensions: Respondents who advocated this noted that PRs are already liable for reporting and paying Inheritance Tax and have oversight of the estate as a whole

• separate tax charge on pension funds and benefits: Some respondents suggested removing pensions from the scope of Inheritance Tax altogether, and instead levying a separate flat-rate tax charge on PSAs for any unused pension funds or death benefits

• remove the Income Tax differential for pension benefits taken before and after age 75: Some respondents suggested that, rather than bringing pension funds into Inheritance Tax, the government should make all death benefits taxable at the recipient’s marginal rate of Income Tax irrespective of the age of the member at death

Government response

While many respondents supported the principle of bringing pension wealth into the scope of Inheritance Tax, the majority strongly opposed the proposal to make PSAs liable for reporting and paying Inheritance Tax due on the pension component of an estate. The key points that were consistently raised by respondents were:

• non-liable pensions being brought into the Inheritance Tax process: PSAs will not have any knowledge of the wider estate and so will have to share information with PRs to establish whether there is any Inheritance Tax due, assuming liability until told otherwise. Of around 213,000 estates annually with inherited pension wealth, more than three quarters are estimated to have no Inheritance Tax liability but would nonetheless be brought into the process under the PSA-liable model

• delays in paying out pension benefits: PSAs are likely to hold back some or all benefits until any uncertainty over the Inheritance Tax position is resolved. This in turn will delay full payments to pension beneficiaries, who may in some cases be vulnerable or face financial hardship as a result

• deadlines and payment on account: respondents consistently stated that it will be very challenging for PSAs and PRs to exchange all the information required to determine the total Inheritance Tax charge by the 6-month payment deadline. It is also reasonably common for the trustees’ discretionary process to take longer than 6 months. To avoid incurring late payment interest charges, PSAs are likely to pay 40% of the value of the pension fund (the maximum possible charge) to HMRC if the Inheritance Tax due has not been determined at 6 months, even if the pension ultimately has no liability. This would create a significant administrative burden for PSAs, PRs and HMRC

• repayment and amendments: payments on account by PSAs would very often necessitate amendments to the Inheritance Tax paid and repayments (as PSAs would in most cases have overpaid). This would place significant administrative requirements on HMRC and PRs, as well as further delaying full payments to pension beneficiaries

The government has reviewed the feedback on the PSA-led process from both consultation respondents and workshop participants. While some of these potential difficulties were recognised previously, the consultation process has highlighted how widespread these would be for both taxpaying and non-taxpaying pension schemes, and the negative impact this could have on the timescales for PSAs to pay out benefits. The government has therefore decided not to proceed with the PSA-led process set out in the technical consultation document.

Liability for reporting and paying Inheritance Tax on unused pension funds and death benefits

From 6 April 2027, PRs will be liable for reporting and payment of Inheritance Tax due on unused pension funds and death benefits.

Pension beneficiaries will become jointly and severally liable for any Inheritance Tax due on unused pension funds and death benefits to which they are entitled from the point at which they are appointed.

Pension schemes will be required to make the liability position clear and explain to non-exempt beneficiaries (such as beneficiaries who are not spouses or civil partners) that Inheritance Tax may be due on the pension when informing them about their benefits, how they can access them and options for paying Inheritance Tax.

While there was no unanimous view on the best alternative process for delivering these reforms, responses to the consultation highlighted several clear advantages of retaining the reporting and payment liability with PRs rather than moving this to PSAs.

PRs are often the only party with oversight of all elements of the deceased’s estate. Consultation respondents who favoured this model noted that PRs are generally best placed to co-ordinate across different parties, including all pensions schemes of which the deceased was a member. The government agrees that it would be better to acknowledge this and to build the liability and reporting process for pensions around the PR, in line with the current process.

The revised process will significantly reduce the extent to which the more than three quarters of estates with inherited pension wealth but with no Inheritance Tax liability are required to engage with the Inheritance Tax process. PRs will be required to notify PSAs of a scheme member’s death, and PSAs will be required to share the value of any unused pension funds or death benefits with the PR within 4 weeks of receiving notification of the member’s death. PRs will then collect information from each PSA and other components of the estate to reach a total valuation of the estate and determine whether any Inheritance Tax is payable. As set out in Annex B, legislation will be updated to provide the right framework to allow PSAs and PRs to exchange all the necessary information for Inheritance Tax purposes and Income Tax if due on inherited pensions.

Most non-taxpaying pensions will see no difference at all after PRs have confirmed that no Inheritance Tax is due on the estate. PSAs will be able to proceed as normal to pay out benefits as soon as trustees have completed their discretionary processes and identified the correct beneficiaries.

For estates where Inheritance Tax is due, a PR-led process for reporting and paying Inheritance Tax due on pensions is more consistent with the current Inheritance Tax system than a PSA-led process. PRs are currently responsible for reporting and paying Inheritance Tax on non-discretionary pension schemes (which are already in scope of Inheritance Tax) and for certain other assets which do not pass directly through the estate, such as joint property passing by survivorship.

Process for reporting and paying Inheritance Tax on unused pension funds and death benefits

A high-level explanation of the PR-led process is set out at Annex A. In the technical consultation document, the government acknowledged that the main potential drawbacks with the PR-led model are liquidity challenges (if the PRs themselves do not have access to the relevant pension funds to pay the tax) and double taxation (for example, if the beneficiary draws down their inherited pension to reimburse the PRs for Inheritance Tax, and then also has to pay Income Tax on those funds at their own marginal rate).

To mitigate the liquidity challenges, PRs and pension beneficiaries (once appointed) will have several options to pay Inheritance Tax due on unused pension funds and death benefits, as follows:

• pay directly from the free estate: PRs can pay the Inheritance Tax due on the entire estate — including the pension component — directly from funds in the free estate, then proceed to apply for probate. If the beneficiaries of the free estate and the pension beneficiaries are the same, they can then take their pension benefits in full. If the free estate beneficiaries and pension beneficiaries are not the same, PRs can use their existing legal right of reimbursement from pension beneficiaries under the Inheritance Tax Act 1984 to reclaim the value of the Inheritance Tax paid on the pension and distribute this to the beneficiaries of the free estate. HMRC will work with the pension industry to provide clear guidance and support for pension beneficiaries in respect of their Inheritance Tax liability, options for paying, and their responsibility to the wider estate. If pension beneficiaries take their pension benefits in full, they will be able to claim a repayment from HMRC of any Income Tax paid on the amount of the Inheritance Tax charge on their benefits

• pension beneficiaries direct PSAs to pay: Alternatively, PRs can pay the Inheritance Tax due on the free estate and work with pension beneficiaries (once appointed) to pay the Inheritance Tax due on the pension component. The government will set up a new scheme through which beneficiaries can direct the PSAs to pay the Inheritance Tax on their behalf directly to HMRC. PSAs will inform beneficiaries that they will be liable for any Inheritance Tax and this payment option. If the beneficiary directs the PSA to pay, they will then receive the remaining benefits subject to Income Tax if appropriate

• pension beneficiaries take their pension benefits in full and pay Inheritance Tax directly: Alternatively, if the beneficiary takes their benefits in full they can pay the Inheritance Tax directly and contact HMRC to arrange a refund for any Income Tax paid on the amount of the Inheritance Tax charge on their benefits

Income tax will not be due on the amount of relevant death benefits equal to any inheritance tax due on that pension. HMRC will ensure that there are mechanisms in place for pension beneficiaries to recover any overpayments of Income Tax, if needed.

Respondents highlighted the difficulty under the PSA-led process for pension schemes which have made significant investments into illiquid assets to raise sufficient liquid assets to pay the Inheritance Tax due on the pension. As set out above, under the PR-led process, PRs can pay the Inheritance Tax due on the entire estate, including the pension, directly from funds in the free estate. Alternatively, pension beneficiaries can pay the Inheritance Tax due on the pension directly to HMRC.

PRs are required to pay Inheritance Tax before they can apply for probate and distribute the assets in the estate. The government recognises the difficulties that PRs may face if they do not have sufficient liquid funds in the estate to pay the tax. There are several existing mechanisms to help PRs raise funds to pay Inheritance Tax. These include the Direct Payment Scheme, which can be used to transfer money from the deceased’s account(s) before probate is granted, and the ability to pay by the Inheritance Tax on certain assets that may take time to sell by annual instalments. Once the first instalment (and any others due when the plan is set up) has been paid PRs can proceed to apply for probate.

While these mechanisms will not allow PRs direct access to pension funds, they will help PRs to access sufficient assets in the wider estate to pay the Inheritance Tax due on the whole estate (including the pension component), or reduce the amount of tax to be paid before probate is granted. In certain circumstances, HMRC can allow the issue of a grant on credit to postpone payment of Inheritance Tax until after probate has been granted so that the PRs can access assets in the estate.

HMRC analysis suggests that PRs will, in most cases, be able to pay the Inheritance Tax due on the pension component from within the wider estate, particularly after the Inheritance Tax nil-rate bands have been applied. For estates with an Inheritance Tax liability, inheritable pension wealth tends to make up a relatively small proportion of the total estate value. HMRC estimates that, of the taxpaying estates affected by these reforms in tax year 2027 to 2028, the pension component makes up less than 5% of the net value of the estate in more than half of cases, and less than 60% of the estate in almost all cases.

We expect there will be a small number of cases where none of these payment options are suitable — for example, where there are insufficient funds in the free estate to pay the Inheritance Tax due on the pension, and the pension beneficiaries are not known or have not yet been appointed. PRs and beneficiaries (where known) should make all reasonable efforts to pay as much Inheritance Tax as possible before the 6-month payment deadline using one of the methods above. After this point, late payment interest will begin to accrue on any unpaid tax.

PRs’ personal liability is limited to the value of the assets which pass directly through the estate. In cases where it has genuinely not been possible to pay the Inheritance Tax due on the pension component from the wider estate, or for the pension beneficiaries to either direct the PSAs to pay or to pay HMRC directly, PRs will be able to speak to HMRC to agree how to proceed.

If unable to pay the Inheritance Tax due on the pension, PRs will need to wait for the pension beneficiaries to be appointed before the tax can be paid. At this point, the pension beneficiaries will become jointly and severally liable for the Inheritance Tax on the pension.

It is common for the value of assets within an estate to change. It will remain the PRs’ responsibility to inform HMRC of any amendments and they will be liable for any changes to Inheritance Tax as a result. Changes to the value of the estate may impact the amount of nil rate band available for the pension. These changes could affect both the Inheritance Tax and Income Tax position for pension beneficiaries. As set out in Annex A, PRs, supported by HMRC guidance and tools, will be responsible for informing pension beneficiaries of amendments and the impact on Inheritance Tax and Income Tax resulting from any amendments to the value of the estate.

Other views on liability and payment

Several respondents did not favour either the PSA-led model or the PR-led model, instead suggesting alternative policy proposals outside of the Inheritance Tax system, including a flat rate tax charge on inherited pension wealth.

The government has been clear that it intends to bring unused pension funds and death benefits into the scope of Inheritance Tax and that it is consulting on the best process for doing so rather than on alternative methods of levying tax from pensions. The policy objective is to remove distortions resulting from changes to pensions tax policy in the last decade, which have led to pensions being openly used and marketed as a tax planning vehicle to transfer wealth. The announced reforms also remove inconsistencies in the inheritance tax treatment of different types of pensions. A flat rate tax charge on pension wealth would not achieve these objectives.

A flat rate tax charge would be a very different policy with very different impacts. Fewer than 10% of estates annually are forecast to have an Inheritance Tax liability in the coming years. A flat rate tax charge on pensions would impact a different (and larger) population of individuals below the current Inheritance Tax thresholds. If the flat rate is set at a lower rate than the current rate of Inheritance Tax (as some respondents and workshop participants have suggested), this would lead to unused pension funds being taxed more lightly than other assets subject to Inheritance Tax at a rate of 40%. This would likely mean that pensions would continue to be used as a tax planning vehicle for the wealthiest individuals. As such, the government has no plans to change the design of the previously announced reforms to a flat rate tax charge, or any other alternative policy design suggested by respondents.

Many respondents asked that the 6-month payment deadline for Inheritance Tax be extended under a PSA-led model, to allow trustees time to complete their discretionary processes. The government does not intend to change this deadline under the new PR-led process. The requirement to pay Inheritance Tax within 6 months plays an important part in ensuring that the tax is collected quickly and efficiently, and any extension to this deadline would come with an associated Exchequer cost. As set out above, a number of payment methods, such as the Direct Payment Scheme and payment by instalments, are available to help PRs pay if they cannot immediately access realisable assets in the estate.

The government remains committed to making the best use of digital platforms and will continue to work across government to deliver improvements where services align. The PR-led process outlined in this response will deliver significant simplifications and benefits for paying pensions to exempt beneficiaries, such as surviving spouses or civil partners. The government recognises the need for prompt and accurate information sharing between PRs, PSAs and beneficiaries and, as set out in Annex B, legislation will be updated to provide the right framework to provide PSAs and PRs to exchange all necessary information. The government has also announced that it will introduce a new digitalised Inheritance Tax service in the 2027 to 2028 tax year, which will make submitting information and paying tax simpler and quicker. However, at the present time neither the Pensions Dashboard nor ‘Tell us Once’ service could provide solutions or additional support for PSAs or PRs

Other issues

Some respondents asked for clarification on specific issues which did not directly relate to the technical consultation questions. Many of these related to the scope of the reforms and, where possible, these have been covered in Annex C of this document.

Death in service benefits

Death in service benefits are employment benefits which provide a lump sum payment (typically a multiple of an individual’s salary) to a deceased employee’s beneficiaries if they die while employed. Death in service lump sums are often provided as part of pension arrangements, but do not have to be. Currently, a death in service benefit is only subject to Inheritance Tax where the pension scheme or trust from which it is paid is non-discretionary. This means that some death in service benefits are currently subject to Inheritance Tax.

The technical consultation stated that all lump sum death benefits would be in scope of Inheritance Tax. Therefore, death in service benefits, provided as lump sums from registered pension schemes, would have been brought into scope from 6 April 2027.

Respondents queried this, noting that it would create inconsistencies with death in service benefits paid in other ways, particularly payments of lump sums from a non-pension group life policy held in trust. They suggested that bringing all lump sum death benefits into scope would result in a behavioural response from industry, with employers restructuring their benefit packages to provide death in service benefits via non-pension trust structures instead. However, this would not be possible for many public sector defined benefit pension schemes where payments are funded by the Exchequer, thus giving rise to a different inconsistency.

Government response

The government agrees with the points raised by respondents to the technical consultation.

From 6 April 2027 all death in service benefits payable from registered pension schemes will be out of scope of Inheritance Tax, regardless of whether the scheme is discretionary or non-discretionary. This means that there will be consistent treatment of death in service benefits between discretionary and non-discretionary schemes.

This is in line with the broader policy objective of removing inconsistencies in the Inheritance Tax treatment of different types of pension benefits. It will ensure that there is no behavioural incentive for employers to provide death in service benefits through alternative non-pension trust structures (which would have created a new inconsistency with public sector defined benefit schemes unable to take this course of action).

It also means that death in service benefits paid by non-discretionary pension schemes which are currently in scope of Inheritance Tax, such as the NHS and other public sector schemes, will be brought out of scope from 6 April 2027.

Conclusion and next steps

The government has changed the process set out in the original technical consultation in recognition of the overwhelming feedback from respondents about the drawbacks of the PSA-led model. The government will make PRs liable for reporting and paying Inheritance Tax on pensions, whilst recognising that this was not the preferred option for all respondents.

The process set out in Annex A contains several different options for PRs and pension beneficiaries to pay any Inheritance Tax due on unused pension funds and death benefits. This acknowledges that PRs will not always have direct access to pension benefits or sufficient funds within the wider estate to pay the Inheritance Tax due on the pension component of the estate. Where both Income Tax and Inheritance Tax are paid on the same pension benefits, HMRC will develop mechanisms to account for any overpayments and ensure that these are refunded to beneficiaries.

The process at Annex A does not capture every scenario and will not be suitable for every estate with inherited pension wealth. The government is committed to working with industry experts and other stakeholders to hear feedback, refine and develop the process for reporting and paying Inheritance Tax on pensions. HMRC will lead this process through its existing external stakeholder groups for tax and pensions representative bodies, agents, and advisors. This will inform further tools and guidance on the forthcoming changes to support PRs, PSAs, and beneficiaries ahead of implementation in April 2027.

The government has also published draft legislation to implement these changes for technical consultation. We welcome comments on the draft legislation by 15 September. Comments should be sent to HMRC at ihtonpensions@hmrc.gov.uk.

The government will also publish draft legislation in due course on the changes to the information sharing regulations, set out in Annex B.

Annex A: Process for reporting and paying Inheritance Tax on unused pension funds and death benefits from 6 April 2027

The following is a high-level illustration of how the PR-led process for reporting and paying Inheritance Tax on unused pension funds and death benefits is expected to work in practice.

The government recognises that some of the stages below will overlap, and that this process will not capture all customer journeys. HMRC will continue to work with industry experts to develop and refine these processes and will publish further tools and guidance to support PRs, PSAs, and beneficiaries ahead of implementation in April 2027.

The process below requires information to be shared between PSAs, PRs and HMRC in a timely manner. The government will introduce legislation to provide for this, and HMRC will publish accompanying guidance. Further details are set out in the Information Sharing Regulations section in Annex B

Stage 1: Information exchange to establish the value of any pension benefits to be included in the estate

PRs will, as now, identify the pension schemes of which the deceased was a member and contact the relevant PSAs to inform them of the member’s death. They should also inform the scheme whether the deceased had a surviving spouse or civil partner.

Once PSAs are aware of a member’s death, they will begin their processes to determine how benefits are to be distributed. If the scheme is discretionary, the pensions trustees will commence their discretionary processes.

Regardless of the nature of the scheme, PSAs must tell the PRs the value of the pension for Inheritance Tax purposes within 4 weeks of receiving the member’s death notification. This will be the value of all relevant unused pension funds and pension death benefits as at the date of death.

Once the PSA has completed their processes to determine how the benefits should be distributed, they will tell the PR how the pension benefits will be split between exempt beneficiaries (such as spouses and civil partners) and non-exempt beneficiaries. This process is expected to take longer for discretionary schemes, due to the additional time needed to complete the trustees’ discretionary process.

Stage 2: PRs value the estate

The PR will collect information from each PSA and other components of the estate to reach a total valuation of the estate and determine whether an Inheritance Tax account should be returned to HMRC.

The PR will inform the PSA(s) that an account is required, provide the Inheritance Tax reference number and request identity information about the pension beneficiaries. The exact information will be limited to that needed for completing the account.

Stage 3: PRs file Inheritance Tax account and pay Inheritance Tax (if needed)

If no Inheritance Tax account is required, PRs can tell the pension beneficiaries (if known) and the PSAs that no Inheritance Tax is due. Generally, there will then be no further action for PRs regarding the pension component of the estate. Therefore, they can proceed to apply for probate and distribute the assets in the estate. PSAs will proceed to complete their processes to determine beneficiaries and distribute benefits.

If an Inheritance Tax account is required but no Inheritance Tax is due, PRs will return an account to HMRC, providing the value of the estate including the value of any pension benefits as established (Stage 1) and beneficiary details (Stage 2). They can then proceed to apply for probate and distribute the assets in the estate.

If Inheritance Tax is due, PRs will establish how much Inheritance Tax is attributable to the different pension components of the estate and submit an account to HMRC.

PRs will inform the pension beneficiaries (if known) and the PSA of the amount of the Inheritance Tax due on their component of the estate.

There are then several ways that the Inheritance Tax on the pension component of the estate can be paid, as set out in para 2.4 the government response section above.

Stage 4: Distribution of pension benefits (PSAs and beneficiaries)

Once they have been notified of a death, the PSA and trustees will start the process of identifying beneficiaries and paying out benefits. This stage will overlap with Stages 1, 2 and 3 above.

Once the pension beneficiaries have been identified, the PSA will tell them the amount of pension funds and benefits they have inherited. They will also set the options for how the beneficiary can take the pension (such as lump sums or forms of pension income).

Exempt beneficiaries (including spouses and civil partners) will be able to take their benefits immediately.

For non-exempt beneficiaries, the PSA will explain that Inheritance Tax may be due on the pension. They will also explain that as pension beneficiaries they are now jointly and severally liable with the PR for any Inheritance Tax due on the pension benefits they have inherited. The pension beneficiary then has options for how to pay any Inheritance Tax due on the pension, as set out at paragraph 2.4 the government response section above.

Inherited pension wealth may also be subject to Income Tax, depending on the deceased’s age at death and the type of benefit. If the individual dies before age 75, death benefits (including lump sums and inherited drawdown pensions) are typically taken free of Income Tax. If they die on or after age 75, these benefits are usually taxed as income at the recipient’s marginal rate.

If the pension beneficiary directs the PSA to pay their Inheritance Tax liability, these payments will be authorised payments and will not be subject to Income Tax.

If Inheritance Tax is due, and the pension beneficiary does not direct the PSA to pay, they may end up paying Income Tax on the benefits they receive. In this scenario, pension beneficiaries will need to contact HMRC to request a refund of Income Tax. HMRC will develop the systems to support this process and publish further guidance on how it will operate.

Stage 5: Amendments

PRs will be responsible for managing any amendments to the estate and submitting any amended Inheritance Tax accounts to HMRC.

If an amendment results in more Inheritance Tax being due, the PR will contact the pension beneficiaries (or PSA if the beneficiaries are not yet known) and inform them of the increase. The additional Inheritance Tax can be paid through one of the routes set out above.

If an amendment results in less Inheritance Tax being due, the PRs actions will depend on whether probate has been granted. Generally, Inheritance Tax refunds will not be made until the deceased’s account is settled. When refunds are issued, PRs are responsible for distributing these to the appropriate beneficiaries.

When pension beneficiaries are informed of any amendments to the Inheritance Tax on the estate, they will need to contact HMRC directly if any corresponding adjustments are needed to the Income Tax due on their pension funds.

Annex B: Information sharing regulations

After a member has died, PSAs and PRs are already required to share information about the deceased and beneficiaries. The existing requirements are set out in The Registered Pension Schemes (Provision of Information) Regulations 2006 (SI2006/567).

Legislation will be updated to provide the right framework to allow PSAs and PRs to exchange all the necessary information for Inheritance Tax purposes and Income Tax if due on inherited pensions. The information sharing requirements are not covered in the draft primary legislation published alongside this document. The government will consult on draft legislative provisions in due course and have set out below what we expect these to cover.

There are key points throughout the process where information will be shared.

1. Immediately after the death of the member. The PR will, as now, need to contact all the deceased’s pension schemes to obtain information. The PSAs will: a. tell the PR the value of in-scope unused pension funds or death benefits on the date of death within 4 weeks of receiving the death notification. b. once pension beneficiaries are appointed, the PSA must tell the PR the split between exempt and non-exempt beneficiaries. If there is no surviving spouse or civil partner, this will not need the discretionary process to be completed. c. We do not expect there to be a regulatory duty to share information about beneficiary identities at this stage.

2. Once the PR is aware that an Inheritance Tax account is required, they will need further information from the PSAs. The PSA will supply the beneficiary’s identity details (including name, address, date of birth and National Insurance number if appropriate) to the PR and confirm the benefit value or values for each beneficiary. Values are needed for the account and for calculating each beneficiary’s Inheritance Tax liability. These details will match those required for the Inheritance Tax account. If the PSA knows that Inheritance Tax is due, they can support the beneficiaries to understand their liability and make informed decisions.

3. If beneficiaries opt to direct the PSA to pay their Inheritance Tax, the PSA will: a. Where conditions are met, supply the beneficiary with a ‘certificate’ showing how much Inheritance Tax was paid to HMRC, the Inheritance Tax reference number, the date of payment and confirm the beneficiary’s identity. b. Alternatively, if the conditions are not met, they will inform the beneficiary. c. Alongside the Inheritance Tax payment, they will supply the same information to HMRC.

4. Once the final payment of a lump sum is made, or all beneficiaries have placed their benefit into pension income streams, the PSA will: a. Confirm that all pension funds have been distributed, so the PR knows that beneficiaries have received their benefits. b. Provide details of lump sums (amounts and beneficiary identities), so the PR can determine whether the deceased’s lump sum and death benefit allowance has been exceeded (already required).

Annex C: Scope of the reforms

Respondents to the consultation asked for clarification on the points below:

Trivial Commutation Death Benefits

Trivial Commutation Lump Sum Death Benefits are one-off payments, not exceeding £30,000, that convert a person’s entitlement to a small amount of pension income into a single lump sum. The decision to commute pension income can be made at any point when conditions are met.

The intention was that where the member had a right to a small pension income which they could commute, the value would be in scope for Inheritance Tax. This remains the policy intent. However, as a beneficiary can commute dependent scheme pension income, which is not within scope of Inheritance Tax, the value of this should not be brought within scope just because it has been commuted. Therefore, the original pension income, and not the Trivial Commutation lump sum, should be considered for Inheritance Tax purposes.

Joint Life Annuities

Joint life annuity products are principally designed for, but not limited to, couples. Where a member chooses to take a joint life annuity, it continues to be payable to the chosen survivor after the member’s death (usually at a reduced rate). If the chosen survivor was a spouse or civil partner the usual Inheritance Tax exemption would apply.

For unmarried couples and children, the rights of the survivor are separate from the rights of the member. The survivor’s rights (paid from a joint life annuity) are not part of the member’s estate and are not in scope of Inheritance Tax.

Unauthorised payments

Any unauthorised payments made from a deceased member’s pension fund will be in scope of Inheritance Tax.

Annex D: List of representative bodies, tax and pensions professionals, groups and organisations which responded to the technical consultation

• 2020 Financial Advice
• 3173
• Association of Consulting Actuaries
• AFH House
• AJ Bell
• Association of Professional Pension Trustees
• Association of Tax Technicians
• AV Trinity
• Aberdeen
• Aegon
• Alan Ellis Financial Services
• Andrew Heptinstall Independent Financial Advisor
• Aon
• Aptia Group
• Arc Pensions Law
• Association of British Insurers (ABI)
• Association of Financial Mutuals
• @SIPP
• Aviva
• Avon Pension Fund
• Azets Wealth Management
• BDO Accountancy
• Banner Jones Solicitors
• Barnett Waddingham
• Birketts
• Boodle Hatfield
• Boston Consulting Group
• Brightwell Pensions
• Broadstone
• Browne Jacobson
• Burley Fox
• Bury Walkers
• CILEX
• CMS
• Canada Life
• Cannizaro Wealth Management
• Capita Pension Solutions
• Castlegate Capital
• CenTax
• Charles Burton
• Charles Wilkinson Financial Planning
• Chartered Institute of Taxation (CIOT)
• Chase de Vere
• Church of England Pension Board
• City and Trust Finance
• Clarke Willmott
• Clearwater Wealth Management
• Clwyd Pension Fund
• Cumbria Fire and Rescue Service
• Curle Stewart Solicitors
• DMH Stallard
• DRR Financial Consultants
• David Hewitt Partnership Ltd
• David Keddie Wealth Management
• De Luca West Financial Planners
• Deloitte
• Delta Financial Systems
• Dentons Pensions
• Department of Health and Social Care
• Derbyshire Pension Fund
• Dixon Financial Management
• Dorset Council
• Dunstan Thomas
• Executive Benefit Services (EBS) UK
• EQ Retirement Solutions
• East Sussex Pension Fund
• Echo Financial
• Enhance Solutions
• Evans Falco
• Evelyn Partners
• Eversheds Sutherland
• FTI Consulting
• Fawbert Adams Chartered Accountant
• Fidelity International
• Fieldfisher
• Financial Conduct Authority (FCA)
• Financial Techniques
• Find Peace of Mind
• Fiona Bruce Solicitors
• Firefighters’ Pensions England
• First Actuarial
• Forces Pension Society
• GRiD
• H&C Financial Planning
• HF Wealth Financial Services
• hIp4u
• Hammersmith and Fulham Pension Fund
• Hargreaves Lansdown
• Heron House Financial Management
• Hill Grafford
• Hymans Robertson
• IFA Helpline
• IGG — Independent Governance Group (IGG)
• ISIO
• Institute and Faculty of Actuaries (IFOA)
• Institute of Chartered Accountants in England and Wales (ICAEW)
• IntegraFin Holdings
• Interactive Investor
• Investment & Life Assurance Group (ILAG)
• JM Taylor Financial Services
• Jackson Jeffrey Financial Services
• Johnsons IFA
• Juniper Wealth
• Kent Pension Fund
• Kernon Kelleher Solicitors
• Kingswood Law
• Lamb & Holmes Solicitors
• Lane Clark and Peacock (LCP)
• Law Debenture
• Law Society of Scotland
• Legal & General
• Lexis Nexis
• Lifetime Lawyers
• Lloyds Banking Group
• Local Government Pension Scheme
• Local Pensions Partnership Administration
• Lothian Pension Fund
• Lumen
• Lumley Baxter
• M&G
• MAPS Wealth Management
• MHM Pensions
• MUFG Retirement Solutions
• Mayer Brown
• Mercer
• Ministry of Defence
• Money Wise UK
• Morgan Griffiths
• Morgan Lloyd
• Morrell Financial Management
• Mountstone Partners
• NFU Mutual — National Farmers Union Mutual
• NHS Pensions
• Northern Ireland Local Government Officers’ Superannuation Committee
• National Pension Officer Group
• National Police Chiefs’ Council
• National Union of Rail, Maritime and Transport Workers (RMT)
• NatWest
• Nest Pensions
• Nigel Sloam & Co
• North Yorkshire Police
• Northern Ireland Fire and Rescue Service
• Northumberland Fire and Rescue Service
• Norton Rose Fulbright
• Nucleus Financial
• Oakwood Asset Management
• Oldfield Accountancy and Advisory
• Osborne Clarke
• Pembroke Asset Management
• Pension Administration Standards Association (PASA)
• Pensions and Lifetime Savings Association (PLSA)
• People’s Partnership
• Pharon IFA
• Pi Partnership Group
• Police Federation for England and Wales
• Professional Money Management
• Punter Southall
• QB Pensions
• Quantum Advisory
• Quilter
• Royal Air Force Families Federation
• Railways Pension Trustee Company Ltd
• Rathbones Financial Planning
• Raworth LLP
• Redington
• Retirement Line
• Roberts & Co
• Rock Investment Services
• Roliscon
• Rothesay
• SG Wealth Management
• SS&C Financial Services International
• SSAS Practitioner.com
• Society of Trust and Estate Practitioners (STEP)
• STEP Scotland
• Sackers
• Sainsbury’s
• SAUL
• Scotsdale Lifetime Partners
• Scottish Friendly
• Scottish Public Pensions Agency (SPPA)
• Sea Green Pensions
• Seabridge SSAS
• ShareSoc
• Shipley Estates
• Shropshire Pension Fund
• Simpson Froud
• SimplyBiz
• Smart Pension Master Trust
• Simon Every
• Spend Time Financial Planning
• St. James’s Place (SJP)
• Staffordshire Local Pension Fund
• Surrey Pension Team
• TACT — The Association of Corporate Trustees
• TFO Tax
• TISA — The Investing and Saving Alliance
• TLT
• TfL Pension Fund — Transport for London
• TPT Retirement Solutions
• Trentham Invest
• The Phoenix Group
• The Prosperity Institute
• The Society of Pension Professionals (SPP)
• Thorntons Pension Scheme
• Town and Country Financial Planning
• Trafalgar House
• Travers Smith
• True Potential
• Trades Union Congress (TUC)
• Turcan Connell
• Tyne and Wear Fire and Rescue Services
• Tyne and Wear Pension Fund
• UBS
• UK Atomic Energy Authority
• UK Platform Group
• United Kingdom Accreditation Service (UKAS) Pension Scheme
• UNISON
• UNUM
• Universities Superannuation Scheme
• University and College Union
• University of Warwick
• Utmost Wealth Solutions
• VWM Wealth
• Vidett
• Wake Up Your Wealth
• WBR Group
• Wealth at Work
• Wealthcare
• We Are Just
• Welsh Pension Fund
• West Yorkshire Fire and Rescue Service
• Westmorland and Furness Council
• Whitehall Group
• Willis Towers Watson
• Wright Johnston & Mackenzie
• XPS Group
• Zedra
• Zurich Assurance
• Zurich Insurance