In October 2024, and as part of the Autumn Budget, the government set out their intention to include most pension pots within the charge to Inheritance Tax, from 6 April 2027. Details on how these changes will be implemented and how this will work in practice were included as part of the Finance Bill Update announced on Monday 21 July.
Full details of the changes and the consultation responses can be found here:
- Policy paper - Inheritance Tax on unused pension funds and death benefits - GOV.UK
- Consultation response - Inheritance Tax on pensions: liability, reporting and payment — Summary of responses - GOV.UK
With the draft legislation now published as of 22 July here:
They’re all quite lengthy reads, so see below for a quick overview of the updated policy outcomes.
What are the surprises?
The key development is that the government has reversed its position on who is to be liable for the Inheritance Tax due on pension funds.
The initial proposal was that it would be the Pension Scheme Administrators, those dealing with the pension funds, who would have the responsibility to settle Inheritance Tax arising on pension funds on death.
In a change of heart, the government announced on Monday that the Personal Representatives will instead be liable to settle the Inheritance Tax arising on pension funds, along with any pension beneficiaries. Personal Representatives (‘PRs’) are the people legally in charge of administering the estate of someone who has died. This role can be held by either an executor or an administrator of an estate. This is perhaps a surprising move, since the PRs will have no direct access to the pension funds and could encounter difficulties in raising the cash needed to pay the tax due, especially if pension beneficiaries do not cooperate.
Against many of the views of those who responded, the government is also taking a harsh line on Inheritance Tax payment timescales. Many proposed that, given the additional burden of having to gather information on the pension scheme funds, calculate the Inheritance Tax due, apportion the tax liability between the estate and pension funds and liaise with pension beneficiaries, more time would be given to PRs to make the initial payment on account before late payment penalties and interest would arise.
However, this is not the case and, as before, late payment interest on any unpaid Inheritance Tax will begin to accrue after the usual 6-month deadline. Together, these changes could not only lead to many more estates suffering an Inheritance Tax charge once pension funds are included but also incur interest as the cherry on top.
What does this mean?
The legislation is only in draft format and the government has asked for further responses by September 2025.
Although the ‘best practice’ procedure is spelt out, there will be numerous cases which do not fit this model. For example, what are PRs to do, practically, if pension beneficiaries do not cooperate, especially if further Inheritance Tax becomes due from the pension pots when the funds have been distributed?
How will this impact estates where the bulk of assets are in a long-held family business or farm, which can already struggle with raising funds to pay Inheritance Tax?
What should PRs consider when distributing an estate and does this mean that estate administration will now need to take longer, with PRs keeping back some funds just in case?
The real challenge will lie in the details of how these changes are implemented, and there will no doubt be practical difficulties.
Our Tax, Trust and Succession experts will keep you updated as we hear more, but, for now, it is increasingly apparent that the already burdensome task of being an Executor or Administrator is becoming more and more challenging. For support with managing these changes or putting a succession plan in place, please contact the team on 01392 207020 or email us at enquiries@tozers.co.uk.
