Pensions and IHT – Liability and Impact
This article looks at recent guidance issued by His Majesty’s Revenue & Customs (HMRC) on the imposition of inheritance tax on pensions. This gives guidance on how the measures are likely to apply from a practical perspective. This is likely to be mainly relevant to CII R04 and J05 students and could also be of interest to those studying for R06, AF5 or AF7.
This article is correct as at 21 July 2026 and is not tax-year specific, but the measures are to come into force with effect from 6 April 2027 so will probably be examined from the 2027/28 tax year.
The imposition of IHT on pensions is gathering pace.
On 11 May 2026, HMRC published a technical note providing further guidance on how it expected this to work. The note clarified a number of issues which had been causing some uncertainty within the financial planning community.
HMRC’s ‘notional pension property’ guidance
The note introduces the concept of ‘notional pension property’. This term loosely refers to unused funds and death benefits paid from a money purchase or defined benefit arrangement. It is defined as the value held under all arrangements within the scheme, reduced by any excluded benefits.
Benefits excluded from the IHT charge
So what are ‘excluded benefits’? Certain benefits will be exempt from the tax. These mainly include dependants’ scheme pensions, trivial commutation lump sum death benefits, payments under a joint life annuity and death in service benefits.
Spousal exemption and guaranteed payments
Death benefits of any nature paid to a lawful spouse will be exempt under the current spousal exemption in place under existing inheritance tax legislation. Annuity or scheme pension payments made under a guarantee period, however, will be caught.
Overseas pensions and long-term residence
HMRC has also stated that, in terms of overseas pensions, the rules will interact with the recently introduced long-term residence regime. This means that, should the deceased have recently moved to the UK and not meet the long-term residence criteria for example, IHT will not be charged on pension schemes which are established outside of the UK.
How IHT and income tax interact
Thankfully, HMRC has clarified that whilst the double whammy of inheritance tax and income tax will apply in the event of the deceased being over the age of 75, the funds deducted to pay IHT will not, themselves, also be subject to income tax.
For example, if a pension fund is £200,000 and £40,000 is paid in inheritance tax, £160,000 remains. IHT is deducted first, and income tax (where applicable) is then charged only on the £160,000 actually paid out, not the original £200,000. This ensures the same money is not taxed twice.
Possible overlap with the LSDBA
However, there may be one notable exception in the form of the lump sum death benefits allowance (LSDBA). It appears that the intention is for the nil rate band and the LSDBA to operate entirely independently of one another. Therefore, should lump sum pension death benefits become payable which, taken alongside any lump sums payable during the lifetime of the deceased, cause the allowance to be exceeded then both charges could theoretically become payable on the excess.
IHT reliefs and pension assets
Finally, HMRC has clarified its intentions with respect to some inheritance tax reliefs which may be available. It has said that quick succession relief will be available where the recipient of funds dies within five years of the previous owner. However, loss on sale relief, business relief and agricultural relief will not apply to pension assets.
There is plenty to unpick there and doubtless there will be further updates before the changes become law in April 2027.
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