Pensions and IHT: what trustees should know

Pensions have long been considered to be a tax-efficient way of retaining and distributing wealth.

Currently, when someone dies, any benefits left in their pension pot will generally be passed on free of inheritance tax (IHT), irrespective of their value. While there are some exceptions to this general rule, many pension savers understandably take comfort in the knowledge that their pension pot (which may be their most valuable asset) will not create an unwanted tax liability for their loved ones. However, from 6 April 2027, a significant change will occur: many benefits payable on the death of a pension scheme member will become liable for IHT.

What’s changing?

The Finance Act 2026 received Royal Assent on 18 March 2026. This legislation provides that many pension death benefits paid by registered pension schemes will now be included within the scope of IHT, and typically taxed at 40% if the combined value of a member’s estate exceeds the IHT nil-rate band.

There are limited exceptions to this new rule – death in service benefits and spousal/dependant scheme pensions are carved out, for example, and the existing statutory flexibilities relating to IHT (e. g. spousal exemptions) will continue to apply. However, the  impact will be noticeable for many pension savers.

What do trustees need to do?

Trustees should be prepared for this change and may wish to get ahead of the curve and start planning now. Key tasks include:

• Amendments to scheme documents: Most pension schemes are administered on the basis that death benefits will be paid free of IHT, and many scheme rules are drafted to facilitate this. Scheme rules will need to be reviewed to ensure they remain appropriate post 6 April 2027. Trustees may wish to consider whether they want to make changes to the beneficiaries who are eligible to receive benefits on a member’s death, for example.
  
  
• Administrative processes: The way in which death benefits are dealt with by scheme administrators will be changing, and trustees should ensure that their appointed administrators have robust processes in place to ensure that the strict reporting and disclosure requirements required by HMRC can be met.
  
  
• Communication with members: Members should be told about the change and signposted to the availability of professional advice if they are unsure of how the changes will impact them. The fact that IHT may be payable should also be explained to members’ beneficiaries in the event of a member’s death. This will require changes to be made to standard member communications and trustees should make sure they are happy with the changes made.
  
  
• Investment strategy: Given the tight timeframes for payment of IHT, trustees with investments that have liquidity constraints may wish to consider whether those investments would remain appropriate in the event that a member died and the assets needed to be realised quickly.
  
  
• Future developments: Trustees should be alive to forthcoming regulations on IHT reporting requirements and timescales, as well as updates to HMRC’s IHT guidance. At the end of March the government published its response to the House of Lords Economic Affairs Committee report on the IHT measures. It noted that detailed guidance, templates, and tools are in progress in relation to the reforms and that regulations will be laid later this year setting out the framework for personal representatives and pension scheme administrators to exchange the information for IHT purposes promptly, including obligatory timescales.

Trustees should consult with their advisers for support on these issues. Your usual Burness Paull pensions contact will be happy to help.

Related News, Insights & Events