From April 2027, pensions, often one of the most valuable assets someone owns, may be brought into the inheritance tax net for the first time.
For many families, this could mean a larger tax bill and, importantly, more responsibility falling on Executors at what is already a difficult time. Understanding what is changing, and what that means in practice, can help avoid delays, stress and unexpected costs later on.
Why is this changing?
From 6 April 2027, most unused pension funds and death benefits are expected to form part of an individual’s estate for inheritance tax purposes. This is a significant shift from the current position, where pensions often sit outside the estate and can pass on free of inheritance tax.
In simple terms, more estates are likely to face inheritance tax, and the administration process will become more complex.
What does this mean for Executors?
If you are acting as an Executor, your role will expand. You will be responsible for reporting and paying any inheritance tax due on pension assets, even though those assets are held by pension providers.
That creates a practical challenge: you are liable for the tax, but you do not directly control the funds.
At a time when you are already dealing with probate, beneficiaries and estate administration, this adds an extra layer of responsibility that needs careful management.
Why early communication matters
Tax reporting deadlines are tight when someone dies, and the new rules make early action even more important.
Inheritance tax is generally due within six months of the end of the month of death. However, Executors often cannot obtain a Grant of Probate until HMRC is satisfied with the tax position.
At the same time, pension providers need to be contacted to confirm the value of benefits and determine who they will be paid to.
In practice, this means:
- You should contact pension providers as soon as possible
- You will need valuations early in the process
- Delays can result in interest charges on unpaid tax
Taking early advice and opening communication channels quickly can significantly smooth the process.
How do you find and value pensions?
Many individuals have more than one pension, built up over a lifetime. Executors will therefore need to take practical steps to identify all schemes.
This typically involves:
- Reviewing personal papers and financial records
- Checking bank statements for pension contributions or receipts
- Speaking to family members, advisers or former employers
Once identified, pension providers will need to supply a valuation. This will depend on the type of scheme, but even where benefits pass to an exempt beneficiary (such as a spouse or charity), a valuation is still likely to be required.
Pension providers are generally expected to respond within a set timeframe, but this can still introduce delays, so starting early is key.
Managing the tax: what options are available?
Executors have two key tools to help manage inheritance tax on pensions.
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Holding back funds
Executors can instruct the pension provider to retain part of the pension benefits before they are paid out. This helps ensure that funds are available to meet the inheritance tax liability, rather than relying on other estate assets.
This approach can protect both Executors and beneficiaries from having to fund tax liabilities from outside the pension.
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Paying tax directly from the pension
Alternatively, it may be possible to arrange for inheritance tax to be paid directly from the pension to HMRC before the remaining funds are released to beneficiaries.
This can be particularly helpful where the pension represents a significant part of the estate and provides a straightforward way to settle the liability.
What if the pension includes illiquid assets?
Some pensions, particularly those linked to business or property investments, may include assets that are not easily converted into cash.
In these cases, careful thought is needed. Selling assets quickly may not be desirable, but the tax still needs to be paid on time.
Executors will need to work closely with beneficiaries and advisers to decide how best to fund the liability, which may involve using non-pension assets or taking a more phased approach.
A changing and developing landscape
While technical guidance has already been published, further detail is expected before the rules take effect in April 2027. There remain areas of uncertainty, and the practical application will continue to evolve.
What is clear, however, is that pensions will no longer sit outside the inheritance tax conversation in the way they once did.
Planning ahead can make a real difference
For individuals, taking stock of pension arrangements during lifetime is increasingly important. Understanding what pensions you have, how they are structured, and ensuring records are up to date can make a significant difference for those left behind.
For Executors, early organisation and professional advice will be key to navigating what is likely to be a more complex process.
Contact our experts to gain an early understanding on this upcoming change.
Key points at a glance
- From April 2027, pensions may be subject to inheritance tax
- Executors will be responsible for reporting and paying tax on pension assets
- Early communication with pension providers is essential
- There are mechanisms to help fund tax from pension assets
- Planning ahead can reduce complexity and stress for families
