Government pushes ahead with inheritance tax reforms for pensions

The UK government has confirmed plans to apply Inheritance Tax (IHT) to unused pensions on death.

From 06 April 2027, unused pensions on death will fall into the estate for IHT purposes – with the government predicting this will raise around £1.5bn a year by the 2029/30 tax year.

Chancellor Rachel Reeves originally proposed extending IHT to pensions in her Autumn Budget 2024. Despite pushback from industry bodies and various pension providers, the government is now moving ahead with adjusted plans following consultation.

A further 10,500 estates are expected to now fall under the IHT net.

What do we know:

• Pension funds included in your estate for IHT purposes: The proposal confirms the inclusion of unused pension funds and death benefits in an individual’s estate for IHT purposes. If you pass away with unused pension savings, those funds will now be treated as part of your estate for Inheritance Tax (IHT) purposes, pensions will no longer be a reliable tax-free legacy, meaning your beneficiaries may need to pay IHT on those pension amounts.
• Reporting and paying the IHT: Previously, pension providers handled IHT reporting and payment, now your family or appointed representatives must take care IHT obligations. Beneficiaries will be able to request that the pension scheme pays the tax on their behalf, but it’s no longer automatic.
• Exemption for ‘death-in-service’ lump sums: It has been confirmed that ‘death-in-service’ lump sums which are paid if someone dies whilst still employed — will be excluded from IHT, regardless of how the scheme operates.
• Relief restrictions: Business Property Relief (BPR) or Agricultural Property Relief (APR), will not be available in respect of assets held within the pension.

What does this mean for you?

These announcements mean an updated review of individual circumstances is important, as there will be a significant change to estate planning. For many people this will result in an increase in the IHT on their death.

To date, advising on these proposed changes has been difficult as details of the application were not announced in the Budget and much uncertainty remained.

However, we now have further details released yesterday with the publication of the draft 2025-26 Finance Bill.  This provides us with more of an accurate framework which should enable us to help you consider your plans and circumstances.

There is much to digest and consider following the latest announcements and we will continue to provide you with more information when we have it.

At Francis Clark Financial Planning we are ready to provide joined up tax pension and tax planning advice alongside our colleagues in PKF Francis Clark.

If you have any further questions, please do not hesitate to contact your financial planner.