HMRC has shared a technical note explaining what inheritance tax changes will come into effect in the near future, which will affect pension pots. Defined contribution pensions will be subject to IHT, which has a standard rate of 40%, from April 6 next year. An estimated 10,500 estates will pay IHT for the first time as a result, according to Government numbers. However, the Treasury says that over 90% of estates per year will continue to pay zero IHT after the changes.

HMRC will begin a public campaign to explain the changes to everyone affected towards the end of this year. Following that, it will publish final official guidance and support materials in spring 2027. “We continue to incentivise pension savings for their intended purpose of funding retirement instead of being openly used as a vehicle to transfer wealth,” a Treasury spokesperson said. HMRC has pointed out two major changes that will come into effect as a result.

Inheritance tax over income tax

Under the current system, beneficiaries pay income tax on any withdrawals from the deceased’s pension. However, under the new rules, inheritance tax will be paid first.

They will then be eligible for a statutory deduction, meaning they’ll only pay income tax on the remaining amount after inheritance tax has been settled, says consumer watchdog Which?.

Executors get more responsibility

Additionally, executors and loved ones will have more responsibility when it comes to tracing all the deceased’s pensions and asking for valuations. They must then report the full value of any pensions to HMRC, along with the rest of the estate.

Under the new rules, pension providers will have to share such information earlier, and they will request proof, like a will or a death certificate. The loved one or executor will combine these figures with the rest of the estate to calculate any tax due using a new HMRC online tool.

Maike Currie, VP Personal Finance at PensionBee, commented: “An admin nightmare is waiting in the wings for grieving families. Personal representatives – usually family members, friends or executors responsible for dealing with someone’s estate after death – will effectively become pension detectives, expected to track down old workplace schemes, historic pension pots and online-only accounts, often with incomplete records and missing passwords.”

She continued: “One simple but important thing people can do now is ensure their expression of wish forms detailing their beneficiaries are up to date with all pension providers. Clear beneficiary information and accurate records could significantly reduce delays, confusion and stress for loved ones later on.

“There is a bit of good news for bereaved families with HMRC confirming that, in most cases, up to half of pension death benefits should still be able to be paid out relatively quickly while inheritance tax liabilities are being settled.”