Draft rules on pensions and inheritance tax finally released – what you need to know.

We’re still absorbing the impact of the draft legislation released on Monday 21 July, which outlines how unused pension funds will be included within the scope of Inheritance Tax (IHT). This development, initially signposted in last year’s Budget, marks a major policy shift—one that could have far-reaching consequences for clients’ estate planning strategies.

Despite ongoing opposition from pension experts and significant lobbying to reverse or soften the measures, the Government disappointingly remains determined to press ahead. While the draft legislation doesn’t provide all the answers that we need, it offers a clearer picture of what financial advisers and personal representatives (PRs) can expect once the rules are implemented in April 2027.

Key Points from the Draft Legislation

Here are some of the most significant takeaways from the draft rules:

• Responsibility for IHT: The obligation to report and settle any IHT due on unused pension funds and death benefits will fall squarely on the shoulders of the deceased’s Personal Representatives (PRs). This introduces a potentially complex administrative burden, particularly for estates with multiple pension schemes. This is a change from the technical consultation issued earlier this year, which placed the obligation on Pension Scheme Administrators (PSAs).
• Scope Exclusions: Not all pension-related benefits are included. Death-in-service benefits from registered pension schemes and dependant’s scheme pensions from defined benefit or collective money purchase arrangements are explicitly excluded from the changes.
• Reporting Timeline: PRs will be required to contact each of the deceased’s pension providers to obtain valuations of in-scope assets. PSAs must respond within just four weeks of being notified of the death. This tight deadline could prove difficult, particularly where assets cannot be valued immediately, like commercial property or non-standard investments.
• HMRC Support Tools: HMRC has committed to providing tools and calculators to help navigate the changes, though there’s currently no detail on what these will look like or when they’ll become available.

Planning Considerations for Advisers and Clients

While the draft legislation is still open to consultation, it is clear that the anticipated but unwelcome change is indeed coming into force. Estate and death benefit strategies will need to be reviewed, with potentially severe financial consequences if no action is taken.

The most immediate and actionable step is ensuring that Expressions of Wishes are current and maintained. Given the new reporting timescales and administrative complexity, having up-to-date documentation can make a meaningful difference in how smoothly pension death benefits are handled and alleviate challenges and stress for PRs.