Government announces Inheritance Tax reform including pensions measure at Autumn Budget 2024

At Autumn Budget 2024 the government announced measures to reform Inheritance Tax, including bringing most unused pension funds and pension death benefits within the value of a person's estate for Inheritance Tax purposes from 6 April 2027¹. The measure takes effect for deaths on or after that date¹.

The government said the change removes distortions that have led to pension schemes being used and marketed as a tax planning vehicle to transfer wealth rather than to fund retirement, and removes inconsistencies in the treatment of different types of pension¹. It pointed to the introduction of pension freedoms in 2015 and the abolition of the lifetime allowance in March 2023 as factors¹.

Between 30 October 2024 and 22 January 2025 the government consulted on the reporting and payment process, proposing that pension scheme administrators would be liable¹. A summary of responses and formal response published on 21 July 2025 announced that personal representatives, not scheme administrators, will be liable for reporting and paying any Inheritance Tax due on unused pension funds and pension death benefits from 6 April 2027¹. Death in service benefits payable from a registered pension scheme remain out of scope¹.

HMRC estimates that of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 will have an Inheritance Tax liability where previously they would not, and approximately 38,500 will pay more than would otherwise have been the case¹. The average liability is expected to rise by around £34,000 when pension assets are included, though HMRC describes these as static estimates and a maximum¹. Most estates will continue to have no Inheritance Tax liability after 6 April 2027¹. The Exchequer impact is put at +£710m in 2027 to 2028, rising to +£1,665m in 2030 to 2031¹.

HMRC has since set out further operational detail. Inheritance Tax will be applied to the pension before income tax, with beneficiaries eligible for a statutory deduction so income tax applies only to the remainder². Personal representatives will still have six months from the end of the month of death to settle any Inheritance Tax due². Providers will be required to share information earlier, allowing personal representatives to begin using alternative proof such as the will and death certificate². The rules also apply to many overseas pensions held by UK residents, including Qualifying Recognised Overseas Pension Schemes, with valuations converted to sterling at the exchange rate on the date of death². Anything left to a surviving spouse or civil partner remains 100% exempt, and dependants' scheme pensions generally remain outside scope, subject to the recipient meeting the legal definition of a dependant².

Why it matters for households

From 6 April 2027, unspent pension pots will count towards the value of an estate, so some beneficiaries will inherit less once tax is paid¹. HMRC expects most estates to remain free of Inheritance Tax¹. Where tax is due, personal representatives must locate all pensions, obtain valuations and report each scheme's share, adding administration during bereavement¹. Beneficiaries may be jointly liable for tax on the pension and solely liable for tax on pensions discovered after a clearance certificate is granted¹. Where funds are withheld, access to 50% of death benefits subject to Inheritance Tax can be delayed for up to 15 months¹. The treatment of pensions and investments when someone dies therefore changes for estates with inheritable pension wealth.

What happens next

Legislation is to be introduced in Finance Bill 2025-26¹. Towards the end of 2026 HMRC will begin a public campaign explaining the changes, before publishing final official guidance and support materials in spring 2027². An HMRC online tool for combining pension figures with the rest of the estate has not yet been launched². Pension consultancy Lane Clark & Peacock said further guidance issued in spring 2027, weeks before cases begin, could leave schemes under pressure to update systems and member communications².