Policy paper

Inheritance Tax on unused pension funds and death benefits

Published 21 July 2025

Who is likely to be affected

This measure will affect individuals inheriting estates within the scope of Inheritance Tax, including beneficiaries of any unused pension funds or death benefits included in those estates. It will also impact personal representatives, their advisors and pension scheme administrators.

General description of the measure

This measure will bring most unused pension funds and death benefits within the value of a person’s estate for Inheritance Tax purposes from 6 April 2027.

Personal representatives will be liable for reporting and paying any Inheritance Tax due on unused pension funds and death benefits.

Death in service benefits payable from a registered pension scheme and dependant’s scheme pensions from a defined benefit arrangement, or from a collective money purchase arrangement, are excluded from these changes and will not be in scope of Inheritance Tax.

Policy objective

This measure removes distortions which have led to pension schemes being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement. It also removes inconsistencies in the Inheritance Tax treatment of different types of pensions.

Background to the measure

In recent years, pension schemes have been increasingly used and marketed as a tax planning tool to transfer wealth without an Inheritance Tax charge, rather than for funding retirement. This has been exacerbated by certain changes in pensions tax policy over the past decade, such as the introduction of pensions freedoms in 2015 and the abolition of the lifetime allowance in March 2023. At present, individuals can accumulate unlimited tax-free savings in their pension, draw on other means to fund their retirement and leave their unused pension assets to be inherited by beneficiaries without any Inheritance Tax charge.

A further factor is a difference in the Inheritance Tax treatment of different types of pension schemes. Some UK pension schemes (for example, the NHS and judicial schemes) are non-discretionary schemes, which are treated as part of an individual’s estate for Inheritance Tax purposes. However, most UK pension schemes are discretionary schemes. Unused pension funds in discretionary schemes can currently be passed on to beneficiaries after death without any Inheritance Tax charge.

At Autumn Budget 2024, the government announced several measures to reform Inheritance Tax and deliver a fairer, less economically distortive tax treatment of inherited wealth and assets, including this measure.

Between 30 October 2024 and 22 January 2025, the government consulted on the process for reporting and paying Inheritance Tax on unused pension funds and death benefits, proposing that pension scheme administrators would be liable for reporting and paying any Inheritance Tax on the pension element of an individual’s estate.

The government published a summary of responses and a formal response to the technical consultation on 21 July 2025. This announced that personal representatives, rather pension scheme administrators, will be liable for reporting and paying any Inheritance Tax due on unused pension funds and death benefits from 6 April 2027. It also confirmed that death in service benefits payable from a registered pension scheme will remain out of scope of inheritance tax.  

Detailed proposal

Operative date

This measure will take effect in respect of pension member deaths on or after 6 April 2027.

Current law

Inheritance Tax legislation is provided for in the Inheritance Tax Act 1984.

Pensions tax legislation is included in:

• part 4 of Finance Act 2004 (as amended by subsequent Finance Acts and supporting regulations)
• the Income Tax (Earnings and Pensions) Act 2003
• the Tax Management Act 1970

Proposed revisions

The government will introduce legislation in Finance Bill 2025-26 to include the value of unused pension funds and pension death benefits within the member’s estate on their death, regardless of whether the pension scheme administrators or scheme trustees have discretion over the payment of any death benefits. The pension death benefits, to which section 5(2) of the Inheritance Tax Act 1984 currently applies where there is no relevant discretion, will be included within the deceased’s estate even where relevant discretion exists, with some exceptions.  

Death in service benefits payable from both discretionary and non-discretionary registered pensions schemes will be excluded from Inheritance Tax. The existing Inheritance Tax principles providing exemption for death benefits passing to a surviving spouse or civil partner, and registered charities will be maintained.

Summary of impacts

Exchequer impact (£ million)

2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030
—	—	—	+640	+1,340	+1,460

These figures are set out in Table 5.1 of Autumn Budget 2024 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2024.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

Inheritance Tax is a wealth transfer tax on the estate (the property, money and possessions) of someone who has died.

From 6 April 2027, this measure will increase Inheritance Tax liabilities for estates which contain inheritable pension wealth and will reduce the inheritance received by beneficiaries. HMRC does not hold complete data on the beneficiaries of estates because it is not required for the administration of the tax.

Most estates will continue to have no Inheritance Tax liability after 6 April 2027. The government estimates that, of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 estates will have an Inheritance Tax liability where previously they would not. Approximately 38,500 estates will pay more Inheritance Tax than would previously have been the case. The average Inheritance Tax liability is expected to increase by around £34,000 when pension assets are included in the value of the estate. These estimates are static and do not take into account potential behavioural changes, such as tax planning or drawing down pension funds faster, which may reduce the number of estates affected. As such, these projections should be viewed as a maximum. The Exchequer impact section above includes the expected behavioural response.

The process for managing the deceased’s estate (including Inheritance Tax) already impacts personal representatives, the deceased’s beneficiaries and pension scheme administrators. Around 75% of IHT400 forms are submitted by agents, with the remaining 25% coming from non-professional personal representatives.

Personal representatives already report and pay Inheritance Tax on the deceased’s estate, including for non-discretionary pension schemes. They will now be required to report and pay the Inheritance Tax due on discretionary pensions, but all parties will need to work together to do this. Personal representatives will need to collect and share information from all the deceased’s pension schemes and pension beneficiaries. They already need to contact all the pension schemes, but will now need to collect information if needed for filing an Inheritance Tax account. This measure will require personal representatives, in addition, to report the amount of tax attributable to each pension scheme.

Beneficiaries may need to make choices about how and when Inheritance Tax should be paid on their benefits.

The majority of estates will not be liable for Inheritance Tax and will therefore have no additional interaction with HMRC. Personal representatives of estates, with inheritable pension wealth, which are liable for Inheritance Tax will be affected as they will be required to carry out additional administration. HMRC will mitigate this impact by providing personal representatives, pension scheme administrators and beneficiaries with clear guidance, a calculator to advise whether Inheritance Tax is due, and a straightforward system to pay the tax liability.  

This measure is expected to have an impact on families going through bereavement where the estate has inheritable pension wealth and an Inheritance Tax liability, in relation to additional administration of the estate.  

Equalities impacts

This measure will affect estates of deceased individuals, where there is inherited pension wealth, and the estate is liable to Inheritance Tax. The majority of Inheritance Tax is paid by estates of individuals aged 75 or over (81%). Inheritance Tax is also paid by the estates of slightly more females than males. One reason for this is that marriages and civil partnerships in the UK are predominantly between opposite sex individuals, as outlined by the Office for National Statistics (ONS). Men generally die at a younger age and those in a marriage or civil partnership will normally pass on all, or a large percentage, of their estate to their spouse or civil partner tax-free. For the period 2020 to 2022 life expectancy at birth in the UK was 4 years longer for females, according to the ONS.

HMRC does not hold data on the other protected characteristics of deceased individuals with estates liable for Inheritance Tax, and so cannot determine conclusively if there are any other equality impacts. This measure will also have an impact on the beneficiaries liable to Inheritance Tax, where there is inherited pension wealth, since those beneficiaries will receive inheritance of lower value once the tax has been paid. HMRC does not hold protected characteristic data on the beneficiaries of estates and so cannot determine conclusively if there are any equality impacts.

Impact on business including civil society organisations

This measure will have a significant impact on certain businesses, both those providing professional personal representative services and pension schemes. Professional personal representatives will be impacted by additional assets and responsibilities. Pension scheme administrators will have new duties to support personal representatives in paying Inheritance Tax on pensions (including the Pension Inheritance Tax Payments Scheme). The impacts for individual personal representatives are set out in the ‘Impacts on Individuals, families and households’ section.

Businesses, including professional personal representatives and pension schemes, will incur one-off costs as a result of this measure. One-off costs may include overall business familiarisation with the changes, upskilling staff on process changes, and updating software to facilitate the new Inheritance Tax reporting requirements. The one-off costs to professional personal representatives and pension schemes are estimated at £60 million.

Ongoing costs will include new responsibilities for pension scheme administrators (particularly of discretionary pension schemes) to share more information with the personal representatives, about all benefits (not just lump sums). Pension scheme administrators will also have to set up and run internal IT systems to offer the Pensions Inheritance Tax Payment Scheme. There will also be new obligations to communicate the potential tax consequences of decisions to members and their beneficiaries. Personal representatives will face increased costs as a result of being liable for reporting and paying the Inheritance Tax.

Ongoing costs for both pension schemes and professional personal representatives are estimated to be £5 million. These estimates reflect the total impact across all businesses; however, these costs will be subject to significant variation between individual businesses. As most estates will remain out of scope of Inheritance Tax, ongoing costs will only apply where pension schemes are managing or administering estates in scope of these changes.

This measure is expected on balance to affect businesses’ experience of dealing with HMRC as in a minority of cases it will require professional personal representatives and beneficiaries to add to their existing administrative processes relating to estates. As with non-professionals, HMRC will mitigate this impact by supporting businesses with clear guidance, a calculator to advise whether Inheritance Tax is due, and a straightforward system of payment.

The proposal is expected to have a negligible impact on civil society organisations such as those who support bereaved families and provide advice on relevant issues (for example, Citizens Advice). This may include one-off costs such as familiarisation.

Estimated one-off impact on transitional businesses costs (£ million)

One-off impact	(£ million)
Costs	60
Savings	—

Estimated continuing impact on administrative burden (£ million)

Continuing average annual impact	(£ million)
Costs	5
Savings	—
Net impact on annual administrative burden	+5

Operational impact (£ million) (HMRC or other)

These changes are expected to have a significant operational resourcing impact on HMRC. The full impacts will be determined following consultation on the draft legislation.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through communication with pension and representative bodies and taxpayer groups.

Further advice

If you have any questions about this change, please email ihtonpensions@hmrc.gov.uk.