Pensions and Inheritance Tax
Changes from 6 April 2027
13 January 2024 | Author: Tomm Adams | Martin Reynard
Pensions and Inheritance Tax Changes from 6 April 2027
In the Autumn Budget 2024 the Government announced that, from 6 April 2027, the value of any ‘unused’ pension funds will be included in the value of the deceased’s estate for the purpose of inheritance tax (IHT). The current IHT exemptions and allowances will apply across the whole, with the pension fund itself paying its pro-rata share of the IHT direct to HMRC.
The proposal is open to consultation, although the Government has said it is only consulting on the mechanics of personal representatives and pension scheme administrators collaborating in accounting for the IHT due. It is not consulting on the principle of charging IHT on pension funds. Consultation closes on 22 January 2025.
The Government has said that the changes will apply equally to UK registered pension schemes and Qualifying Non-UK Pension Schemes (QNUPS), although the consultation is otherwise singularly focused on UK registered pension schemes.
UK registered pension schemes
After the IHT has been settled, the balance pension funds can be distributed, being tax-free or taxed as income as is the case now.
However, the IHT charge would mean that there is a potential reduction in your pot of 40% before distribution. Therefore, you should consider whether you want to review your estate/succession planning in light of the proposed pension IHT charge.
If your pension fund remains primarily for your own retirement security (such that you expect to exhaust the pot before you die), then the IHT change does not affect this.
On the other hand, if you are deliberately putting off drawing on your pension funds to provide a tax-efficient inheritance, you will have to review this strategy in the context of your overall affairs. You might consider taking withdrawals in your lifetime, especially any tax-free cash, and gifting that now IHT free, if you live another seven years. For more information on tax-free cash/lump sum allowance.
Also consider drawing pension income and giving away the net proceeds. While the income withdrawals will be subject to income tax in your hands, if the net income is surplus to your income needs, your gifts can be exempt from IHT.
The consultation document lists 20 types of authorised death benefits that a UK registered pension scheme may make. Of those, only 2 will not be included in the value of your estate from 6 April 2027 – a dependant’s pension paid by a defined benefit pension scheme; and payment of a pension fund to a qualifying charity.
The IHT-liable death benefits include lump sum ‘death-in-service’ payments where those are salary related, for example, ‘two times salary’. While some pension-related life insurance is to be excluded, “All life policy products purchased with pension funds or alongside them as part of a pension package offered by an employer are not in scope of the changes in this consultation document ”. It is not yet clear exactly what such arrangements are.
Qualifying Non-UK Pension Schemes (QNUPS)
A QNUPS is a non-UK pension scheme that meets HMRC’s requirements regarding local regulation and taxation as a pension scheme. Currently, QNUPS are outside the scope of UK IHT.
QNUPS should not be confused with a Qualifying Recognised Overseas Pension Scheme (QROPS) although, a QROPS will itself be a QNUPS enjoying the associated IHT exemption.
It remains to be seen to what extent QNUPS administrators will be able or willing to engage with HMRC in settling direct UK IHT deemed to be due in respect of the QNUPS fund. Local pension regulation and taxation is unlikely to recognise foreign ‘death tax’ as a transaction, any more than UK pension rules would allow a deceased’s UK pension fund to settle direct a non-UK death tax. This raises the spectre of a QNUPS beneficiary having to take a withdrawal from the QNUPS fund – possibly taxed locally, or in the UK for a UK resident beneficiary – in order to settle the UK IHT due.
In any event, the QNUPS IHT exemption applies only to pension benefits attributable to post-5 April 2006 contributions.
Sponsored superannuation schemes
Before the QNUPS regulations were introduced, effective 6 April 2006, a potential IHT exemption was given under the original Inheritance Tax Act of 1984. It applied to a ‘sponsored superannuation scheme’ – a broad definition being sufficient to embrace many non-UK pension arrangements – without burdensome requirements around local regulation and taxation as well as certain UK-based funded unapproved retirement benefit schemes” (FURBS).
The original 1984 IHT exemption continues (for now) to apply to such funds attributable to pre-6 April 2006 contributions.
The 30 October 2024 consultation makes no reference to this older IHT exemption, but it would be optimistic to conclude that the value of such funds/arrangements will not be affected by the 2027 change.
There is concern how the change might be enacted. To simply delete the 1984 clause that provides the IHT exemption would not only bring the value of the fund into UK IHT on death but would trigger periodic lifetime charges that come within the scope of IHT.
Non-UK pension schemes – suggested action
For both post-April 2006 QNUPS and pre-April 2006 non-UK sponsored superannuation schemes you might review your strategy regarding lifetime needs and succession planning. The UK taxation of lifetime withdrawals from any non-UK pension scheme is complicated.
FURBS
UK tax law has changed over the period since FURBS were first established in the 1990s with notable changes coming in April 1998, April 2006, April 2011 and, for non-UK FURBS, April 2017.
It is not possible to summarise succinctly the UK tax and National Insurance aspects of benefits paid on retirement and/or death. It is sufficient to say there where a current IHT exemption exists, primarily under the pre 2006 provisions for a sponsored superannuation scheme, this might be expected to be removed under the April 2027 pension IHT changes. The UK tax aspects of alternative lifetime withdrawal strategies would require specific individual analysis.
It is also worth mentioning that HMRC might currently challenge the ‘purpose’ and hence IHT exemption of FURBS funds that continue to be held undrawn by individuals who have long since left employment and/or have reached age 75.
Would you like to know more?
If you have any questions about the above, please get it touch with your usual Blick Rothenberg contact or Tomm using the form on this page.
Disclaimer:
This article is intended to give you an insight into the tax treatment of UK pension plans, primarily from a UK perspective, based on our understanding of legislation in force as of January 2025.
It is not a comprehensive technical paper and should not be relied upon in in assessing your own situation.
We cannot provide investment advice, and you should consider seeking advice from an independent financial advisor before committing to any course of action that affects your investment portfolio
We are not responsible for the content, advice, or information provided by external websites linked on our platform. These links are for informational purposes only, and we do not endorse or guarantee the accuracy or reliability of any external content.
Useful links:
Technical consultation – Inheritance Tax on pensions: liability, reporting and payment
Contact Tomm

You may also be interested in

UK tax-relieved contribution to non-UK pension schemes

Autumn Budget – Little impact on pensions savers, but a few things to watch for
