Client Update - 25th July 2025

Tariff talk continues, with Japan and the US agreeing a 15% tariff, that is apparently being offered to other regions such as Europe, resulting in markets making further positive progress this week.

Away from the markets, the introduction of Inheritance Tax (IHT) on pension death benefits from April 2027 has moved a step closer with the publication of draft legislation. There were widespread concerns that the original proposals were complex and would ultimately result in delays in winding-up estates. To address this, HMRC have shifted the burden of reporting and paying the IHT on pension death benefits from the scheme administrators to the personal representatives of the estate. This is an important change to what was originally proposed at the autumn Budget, in that it is now the deceased’s personal representatives (PR’s) rather than the pension scheme administrator, who is responsible for reporting and paying IHT on the death benefits.

From 6th April 2027, the scheme administrator will have 4 weeks from the notification of death to provide the PRs with a valuation for IHT purposes. This means that where the scheme has discretion it must confirm the split between how much of the death benefit is to be paid to a spouse or civil partner and therefore free of IHT, and how much is to be paid to non-exempt beneficiaries and potentially subject to IHT.

The PR will be required to collect the values of all the pension schemes the member held and aggregate these with all the other assets within the deceased's estate to determine if an IHT account is required. This is becoming quite an onerous responsibility.

If IHT is due, the PRs must determine how much is attributable to each of the pensions within the estate and submit an account to HMRC. They must then inform the pension beneficiaries and the scheme of the amount of the IHT due on their component of the estate.

Where the death benefits are free of IHT either because the total value of the estate is below the available nil rate band (£325,000) or it is to be paid to a spouse or civil partner, the benefits can be paid immediately without the need for probate.

Non-exempt beneficiaries will be jointly and severely liable with the PRs for the IHT due on their share of the death benefits. If the PRs haven't settled the IHT due on the pension death benefits from the free estate the beneficiary will be given two options.

1. They can request that the scheme administrator pays the IHT due directly to HMRC on their behalf.

2. They can take benefits and pay the IHT due. This will of course result in income tax if the scheme member dies after age 75. HMRC have confirmed that the amount chargeable to income tax will be reduced by the beneficiary's IHT liability.

Alternatively, the PRs can pay the IHT bill in full from other assets within the estate.

The consultation response also provided additional clarity on another key point. Survivor’s benefits under a joint life annuity will not be subject to IHT. Where the continuing payments are made to a spouse these will be covered by the IHT spousal exemption. Where the payment continues to someone other than a spouse, HMRC have confirmed that the survivor's rights are separate from the members rights and therefore outside the member's estate for IHT.

It is good to get this confirmation, however these remain draft rules and may be subject to change before they are enacted. However, it is now clear that the Government is committed to this path. As always, should you have any questions, please do get in touch. Inheritance Tax on pension death benefits from 6th April 2027 looks like being an onerous responsibility and something that your financial planner will be able to help you plan for well in advance. Do have a good weekend.