Background 

As part of the Autumn Budget 2024, the government announced its intention to bring certain unused pension savings and death benefits under UK registered pension schemes into scope of the inheritance tax regime. HMRC launched a technical consultation on how the proposals would be implemented. Further details about this can be found in our November 2024 alert here.  

HMRC has now responded to the technical consultation. Draft legislation, which will implement the changes as part of the Finance Bill 2025/2026, together with an accompanying policy paper, have also been published.  

Key takeaways

Death in service benefits under registered pension schemes will be out of scope of the changes. 

• Many employers provide death in service benefits to employees, such as a lump sum of four times salary, which is provided from a registered pension scheme.
• When the government initially announced its proposal to bring most unused pension savings and death benefits into the scope of inheritance tax at part of the Autumn Budget 2024, it was not clear whether death in service benefits which became payable from a UK registered pension scheme would be within scope of those changes. As part of the consultation response, the government has now confirmed that death in service benefits payable from registered pension schemes will be outside a deceased individual's estate for IHT purposes.  
• This clarification is helpful for employers who are currently using registered pension arrangements to provide this type of benefit. It had, following the Autumn Budget 2024, been unclear whether employers may need to consider changing the type of vehicle under which they provided death in service benefits to a non-registered pension scheme. This issue has now fallen away as something which employers will need to consider.  
• Employers using registered pension schemes to provide death in service benefits may, as a separate issue, still need to consider whether to keep discretion over who death in service benefits are paid to under the scheme, or whether to remove this from April 2027. We consider this further below.  

Reminder of benefits which will be in and out of scope of the changes from April 2027

The overall types of benefits which will be in and out of scope of the changes has remained the same as outlined in the initial consultation. 

• Out of scope (will not fall into a deceased member's estate for IHT purposes):
  • Dependants' scheme pensions
  • Death in service benefits
• In scope (will, from 6 April 2027, fall into a deceased member's estate for IHT purposes): 
  • Dependants' annuities, drawdown pensions and other forms of annuities (but note joint annuities are out of scope)
  • Uncrystallised funds lump sum death benefits (this is typically the type of authorised payment which any unused funds within a DC pot are paid)
  • Five year guarantee lump sums
• Existing IHT principles providing exemption for death benefits passing to a surviving spouses or civil partner, and registered charities, will be maintained. The current nil rate band system will also continue. 

Is there any value in maintaining discretions within registered pension schemes? 

• The decision about who should receive any lump sum death benefits which become payable under registered pension schemes are typically subject to the discretion of the trustees. Unlike at present, once the new regime comes into force from 6 April 2027, whether or not benefits are discretionary will not make any difference to how they are treated for IHT purposes within the context of registered pension schemes. Employers and trustees may, therefore, wish to consider removing such discretion for death benefits. 
• Removing trustees' discretion about who benefits are paid to (so that they essentially are paid at the direction of the member) could have administrative benefits for trustees. It may, for example, reduce the amount of time trustees spend in exercising discretions. This can require fairly detailed enquiries and balancing of considerations. 
• On the other hand, maintaining discretions could also be beneficial. For example, if family circumstances have changed between the time a member completed an expression of wish form and when they died, trustees will have more flexibility to take these changes into account if discretion is maintained. Employers and trustees will, therefore, need to carefully balance the relative advantages and disadvantages of these two approaches. 

Personal Representatives will be liable for reporting and paying inheritance tax on unused pension funds and death benefits from April 2027.

• When the IHT changes in relation to pensions were first announced, the proposal was that pension scheme administrators would be liable for calculating and reporting the IHT due on any of the unused pensions and death benefit element (i.e., the "new" element which was being brough into the scope of IHT). The rationale for this was largely to address potential cash flow issues for personal representatives which could flow from the changes – the main concern being that personal representatives may not be able access pension scheme funds in order to settle inheritance tax which was due in relation to them. A number of concerns were, however, raised during the consultation process with this approach, such as potential difficulties with pension scheme administrators receiving the necessary information from the personal representatives (or indeed being aware of the death of the member in the first place), which could make it difficult for pension scheme administrators to account for the inheritance tax by the six month deadline in practice. There was also a concern that pension schemes administrators would have to be involved in the process in all case where there were pension assets in scope of IHT, even in cases where the value of the overall estate, even including the pension element, was such that no IHT was payable. 
• The government has acknowledged these concerns and has now confirmed that it will change its proposed policy on this so that it will be personal representatives, rather than pension scheme administrators, who are liable to account for the inheritance tax. Beneficiaries will also become jointly and severally liable with the personal representatives to pay the relevant IHT in relation to any pension funds or death benefits to which they are entitled. The government has confirmed that it will be putting in place various measures to assist personal representatives and beneficiaries to mitigate the potential liquidity challenges associated with this. IHT must be paid within six months of the date of death, so timing is tight. 
• Although the requirements on pension scheme administrators will be less onerous than under the initial proposals, pension scheme administrators will still become subject to certain new information sharing and payment requirements under the revised process. For example, pension scheme administrators will be required to confirm the value of the unused pension saving and death benefits payable under the scheme within four weeks of receiving a notification that a member has died. Pension scheme administrators may still also be involved in the payment of IHT due on the pension element to HMRC on beneficiaries' behalf if directed to do so by beneficiaries as part of the measures which the government are putting in place to assist with potential liquidity issues.