Pensions and IHT – The Practical Impact
In this article, we examine the impact of the legislation changes that will see pensions no longer being exempt from inheritance tax. This is particularly relevant for candidates studying towards the CII R03, R04, R06, AF1 and AF5 exams.
This article is correct as at 17 February 2026.
If there is one thing virtually guaranteed during the course of any given Parliament, it is some form of tinkering with the pensions tax system.
Over the last couple of decades, we have seen the introduction and subsequent abolition of the lifetime allowance, the annual allowance, the pension freedoms, the lump sum allowance, and the lump sum and death benefits allowance, to name just a few. The new government then announced in the Autumn 2024 Budget that it intends to include pensions within the estate for inheritance tax (IHT) purposes with effect from April 2027.
Including Pensions Within the Estate for IHT
Since the announcement, further details have emerged as to how the government envisages this working, and it is fair to say that the consequences will be far-reaching. In essence, the government intends that any unused personal pension funds will be included in the estate and potentially subject to IHT at 40% if the overall estate exceeds the nil rate band.
Lump sum death benefits paid from either a money purchase or occupational defined benefit scheme will also be subject to IHT, as will sums used to purchase beneficiary annuities. At present, it appears that dependant’s scheme pensions and previously purchased joint life annuities will escape the tax.
Potential for Double Taxation
The situation poses a number of potentially significant tax consequences. First, under current legislation, where the deceased member has attained age 75, benefits will be subject to a punitive form of dual taxation. The funds will not only be subject to IHT but income tax will also be charged on withdrawals from the fund. This could result in up to two-thirds of an inherited pension pot being lost to tax.
Government Concessions and Clarifications
On a more positive note, there do appear to have been some concessions from the government although the final details are yet to be ironed out. It seems that the spousal exemption will continue to apply to pension funds left to a lawful spouse. The government has also confirmed that it does not intend to apply the tax to death-in-service benefits, as this would not be consistent with the broader rationale of ending the use of pensions as an IHT planning vehicle. In addition, funds used to pay an IHT bill will be deductible from the gross value of the pension fund without any income tax charge arising. The entire bill may also be settled using non-pension assets, where sufficient assets exist.
Unanswered Questions and Future Changes
The proposals raise some important questions regarding the future of the current system. In particular, it remains unclear whether the income tax exemption for benefits inherited where the member died before age 75 will continue. With public finances remaining under pressure, further tax changes cannot be ruled out, and following the abolition of the lifetime allowance there appears to be limited justification for the differing tax treatment of pre- and post-75 benefits.
Why This Matters for CII Candidates
This is a significant legislative change and one which CII candidates studying towards taxation or pensions examinations should keep abreast of!
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