Inheritance tax on pensions: HMRC reveals how the new rules will work in practice

HMRC has provided new details on how inheritance tax will apply to pensions from next year. 

Inheritance tax is charged where the estate of someone who has died exceeds the available tax-free allowances. Previously exempt, any unspent pension pots will count towards the value of an estate from April 2027.

In a technical note published this month, the tax office confirmed further details on how the new legislation will work to help taxpayers prepare for the changes. 

The timeline for new pension tax rules

Since the changes were announced in the 2024 Autumn Budget, HMRC has faced pressure to confirm exactly how pensions will be brought into the scope of inheritance tax. 

The technical note published by HMRC has provided further detail on how the new regime will operate, but this isn't the full legislation. 

Towards the end of 2026, HMRC will begin a public campaign to explain the changes to everyone affected before publishing final official guidance and support materials in spring 2027. 

Pension consultancy firm Lane Clark & Peacock's (LCP) principal Tim Camfield said this could leave schemes under pressure to update systems, member communications and websites ahead of implementation: 'We have concerns about the impact of further guidance being issued in spring 2027, just weeks before actual cases begin to arise.

'Time is running out for HMRC to give schemes the detailed information they will need to implement a new system that starts in less than a year’s time.'

A Treasury spokesperson said: 'We continue to incentivise pension savings for their intended purpose of funding retirement instead of being openly used as a vehicle to transfer wealth. More than 90% of estates each year will continue to pay no inheritance tax after these and other changes.'

• Find out more: one year until inheritance tax applies to pensions – how to prepare

What rules have been confirmed?

Here are the key details from HMRC's technical note: 

Inheritance tax will be taken before income tax

HMRC has clarified how inheritance tax will interact with income tax to avoid 'double taxation' on the same pension pot. 

Currently, if you die after the age of 75, your beneficiaries pay income tax on any withdrawals from your pension. Under the new rules, where inheritance tax is due, it will be applied to the pension first.

The beneficiary will then be eligible for a statutory deduction, meaning they'll only pay income tax on the remaining amount after inheritance tax has been settled. This aims to make sure that the total tax bill is lower than it would have been if both taxes were applied to the full original value of the pension.

• Find out more: inheritance tax calculator

Families face extra admin

Under the new system, personal representatives (loved ones or executors dealing with the estate) will be responsible for locating all of the deceased's pensions and contacting providers for valuations. 

From April 2027, before you can get probate you must report the full value of the estate, including any pensions, to HMRC and pay any tax that is owed.

Currently, pension providers wait for official probate documents before they will discuss a deceased person's account. However, from next year, providers will be required to share information much earlier, allowing personal representatives to begin the process using alternative proof, such as the will and death certificate.

Using a new HMRC online tool – which has not yet been launched – the personal representative will combine these figures with the rest of the estate to calculate any tax due and notify each pension scheme of its specific share of the bill. 

• Find out more: ways to gift money tax-efficiently

Deadline for paying tax will remain the same

Personal representatives will still face a six-month window from the end of the month of death to settle any inheritance tax due.

To make sure funds are available for this, executors can tell providers to withhold up to 50% of pension benefits for up to 15 months. This power can be used quite early in the process, where the executor has ‘good reason’ to think that inheritance tax will eventually be due. If there’s no will, someone who expects to act as executor may, with evidence, issue a withholding notice.

Both the personal representative and the beneficiaries also have the option to request that the pension provider pay any tax due directly to HMRC.

• Find out more: how does HMRC investigate underpaid inheritance tax?

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Exemptions are still in place

Anything left to a surviving spouse or civil partner – including pensions – will remain 100% exempt from inheritance tax. 

HMRC has also clarified that most 'death in service' benefits – lump sums paid out by an employer if you die while still working – will remain exempt. However, they may need to be reported to HMRC by pension scheme administrators. 

Likewise, the government has confirmed that 'dependants' scheme pensions,' which provide a fixed regular income to a child or dependant rather than a lump sum, will generally remain outside the scope of inheritance tax.

However, there are important caveats to this exemption. The person receiving the pension must meet the strict legal definition of a 'dependant' at the time of your death. This means they must be a spouse, a civil partner, or a child under the age of 23 – unless they have a disability. 

This exemption only applies to a guaranteed regular income. If your heirs inherit a flexible drawdown pot or a one-off lump sum, these will be treated as part of your estate and could be subject to inheritance tax. 

• Find out more: what happens to my pension when I die?

Overseas pensions will be affected too

The update clarifies that the new rules aren't just for UK-based pots – they also apply to many overseas pensions held by UK residents. If you have a Qualifying Recognised Overseas Pension Scheme (QROPS), these funds will generally be treated the same way as UK pensions and included in your estate. 

Executors will need to take extra care to get valuations from international providers, as these must be converted into sterling based on the exchange rate at the date of death.

• Find out more: how to find old pensions

Simple ways to prepare for inheritance tax changes

While some estate planning strategies are complex, Sir Steve Webb – former pensions minister and current partner at consultancy LCP – has shared three simple steps to get you started and ease the burden for your loved ones:

• Organise your pensions paperwork: put together documentation of all your pension schemes, alongside policy numbers, to make tracking them down easier. This prevents your executors from having to hunt for lost accounts during an already stressful time. 
• Create a master document for your financial information: you can go beyond just pensions by drafting a single document that lists your funeral wishes, the location of your will, and all key financial details, such as bank details. Keep it in a safe place, so your family has everything they need to handle your affairs easily.
• Arrange power of attorney: Setting up financial power of attorney now can help your representatives deal with banks and pension providers more easily after you die. Having this prior authority often makes institutions more willing to share information early on, helping your loved ones avoid the long delays that usually occur before probate is granted.

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