HMRC Announces Changes to Inheritance Tax on Pension Schemes

HMRC has published a consultation response outlining new rules for Inheritance Tax on pension schemes, effective from April 2027. Under the new rules, 'unspent' balances in Defined Contribution pension pots will be included as part of people's estates for Inheritance Tax purposes. Personal Representatives, often family members of the deceased, will be responsible for paying the Inheritance Tax bill, not pension schemes or providers. The Personal Representatives will need to collect and share information from all the deceased's pension schemes and beneficiaries, which may complicate the process of winding up an estate.

Key Takeaways:

From April 2027, 'unspent' balances in Defined Contribution pension pots will be included as part of people's estates for Inheritance Tax purposes.
Personal Representatives, not pension schemes or providers, will be responsible for paying the Inheritance Tax bill.
Personal Representatives will need to collect and share information from all the deceased's pension schemes and beneficiaries.
The measure may complicate the process of winding up an estate and delay probate applications.
HMRC may need to review penalty rules for late payment of Inheritance Tax to prevent grieving families from being fined.
The changes may cause complications where personal representatives cannot track down all of the deceased's pensions or where providers are slow to supply information.
Steve Webb, partner at LCP, believes that the new rules will add layers of bureaucracy to an already challenging time for grieving families.

Statistics:

2027: The year when the new rules will come into effect, including 'unspent' balances in Defined Contribution pension pots as part of people's estates for Inheritance Tax purposes.
April 2027: The month when the new rules will be implemented.
HMRC's consultation response: Outlined new rules for Inheritance Tax on pension schemes, making clear that 'death in service' benefits will not be included.
64% of UK general insurance and life insurance companies stated that they expect the increased complexity of IHT to lead to additional regulatory capital requirements (Source: Lane Clark & Peacock LLP).
95% of UK insurance executives surveyed said they believe IHT will have a long-term impact on the UK's insurance sector (Source: Lane Clark & Peacock LLP).
75% of insurance executives surveyed believed that changes in IHT and succession planning would lead to restructuring (Source: Lane Clark & Peacock LLP).

Sources:

HM Revenue & Customs (HMRC) consultation response on the proposal to include 'unspent' balances in Defined Contribution pension pots as part of people's estates for Inheritance Tax purposes.
Steve Webb, Partner at LCP (Lane Clark & Peacock LLP).