Update on IHT on Pensions – outcome of government consultation – July 2025

A consultation was then launched, that ended in January 2025, to confirm some of the practical issues over liability, reporting and payment of IHT and the consultation outcome was published on Monday this week.

One welcome clarification is that all death in service benefits will remain out of scope of IHT, including those that are held in registered pension schemes. In fact this will now apply regardless of whether the scheme is discretionary or non-discretionary, which means NHS and other public sector schemes that are currently subject to IHT will be brought out of the scope from April 2027.

Another positive is the confirmation that Income Tax will not be payable on the amount of relevant death benefits equal to any IHT due on that pension and mechanisms will be put in place for pension beneficiaries to recover any overpayments of Income Tax, if needed. This will hopefully avoid the ‘double taxation’ situation that had been anticipated.

The main focus of the consultation was who would be liable for reporting and paying IHT on the unused pension funds and death benefits. The original proposal was that this would fall to the pension scheme administrators (PSAs) but unsurprisingly, responses highlighted the huge difficulties this would cause.

This proposal has therefore been scrapped and it has been confirmed that the deceased’s Personal Representatives (PRs) will be responsible for reporting and paying the IHT on unused pension funds and death benefits, as they are for the rest of the deceased’s estate.

Information sharing regulations will be updated to ensure PRs and PSAs can exchange all the necessary information for IHT and Income Tax due on inherited pensions.

If IHT is due on an estate, PRs will need to work out what portion is attributable to the different pension components. The pension beneficiaries are ultimately liable for this but it is the payment of the tax that may cause issues, especially if there are not enough liquid assets in the free estate to make the initial payment and if the pension beneficiaries are different from the rest of the estate.

The government have confirmed that they are not considering extending the six month deadline for payment of IHT on an estate, after which time penalties are charged.