Last autumn the Government announced the end of the longstanding pensions exemption from Inheritance Tax (IHT). From April 2027 some previously IHT-free pension benefits will be subject to IHT. Pensions professionals have engaged actively in the Government consultations on this major change as the original proposals were fraught with difficulty. Several key changes to the process for assessing and collecting IHT have been made, but the fact that the tax will be charged on some pension benefits assets has not changed.

HMRC has issued the final decisions on the collection of IHT from some pension benefits. Significant changes to the original proposals have been made. For trustees the revised approach seems much better (but it won’t always remove all complications).

1. What are the key concessions?

HMRC’s revised approach makes two welcome concessions.

• Personal Representatives (PRs), rather than trustees, will report and (generally) pay IHT on pension death lump sums.
• All death in service lump sums (whether insured or not) – including those not paid on discretionary trusts and DB scheme survivors’ pensions – fall outside the scope of IHT.

2. What hasn’t changed?

The following aspects remain unchanged:

• Death benefit lump sums, other than those payable on death in service, will be within the scope of IHT. This covers benefits such as 5-year guarantees.
• PRs will remain responsible for paying IHT due within six months of the end of the month following a member’s death.
• Sums paid to a spouse or civil partner will continue to fall outside the taxable estate for IHT purposes. Unmarried partners do not receive the same treatment.

3. Reporting and payment responsibilities

IHT can be settled in one of three ways:

• PRs can pay IHT from the (non-pensions) estate if the pension beneficiaries and estate heirs match exactly in both identity and proportion. If PRs pay where this is not the case, they will need to recover excess payments from the pension beneficiaries.

• A pension beneficiary can require the trustees to pay the IHT to HMRC before the balance of the lump sum is paid to them if “their” pension IHT is over £4,000. If it is below £4,000 then the trustees will have a discretion as to whether they pay the IHT. This appears to be akin to “scheme pays” that already exists to pay annual allowance tax charges. This new form of “scheme pays” isn’t available once the lump sum is paid.

• Pension beneficiaries, once they have received the payment from the scheme, can pay the relevant IHT direct to HMRC.

4. What does it mean for defined benefit (DB) Schemes?

For most DB schemes, survivors’ pensions on death remain out of scope. The only benefits subject to IHT will be death in deferment lump sums and 5-year guarantee payments, which are generally straightforward to calculate and report to PRs. The remaining complication is to whom the lump sum should be paid if it is paid on discretionary trusts.

5. What does it mean for defined contribution (DC) schemes

DC scheme trustees will normally pay out the accumulated pot as one or more lump sums, having decided amongst the possible recipients. Sometimes this is easy – a clear nominated individual under an expression of wish form and no obvious family complications.