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What is Inheritance Tax?

Inheritance Tax is a tax on the money, property and possessions someone leaves when they die.

Most estates don’t pay this tax because they are worth less than £325,000. Anything left to a spouse, civil partner or charity is also exempt.

If an estate is worth more than the threshold, the tax rate on the extra amount is 40%.

What are the current Inheritance Tax rules?

At the moment, unused pension savings and death benefits usually don’t count towards the estate and aren’t taxed. There are a few exceptions, such as some NHS and judicial pensions, but most UK pensions are set up so they aren’t part of the estate.

Because of this, pensions have often been used to pass on wealth without paying tax. For example, someone could save a lot in their pension and use other money for living costs, leaving the pension untouched to pass on tax-free.

If an individual dies on or after 6 April 2027 with unused pension savings or death benefits, most of these will count as part of their estate. This is called notional pension property.

The Personal Representative handling the estate (usually the executor or administrator) will need to include the pension value when working out the estate. They’re responsible for notifying and paying any Inheritance Tax due to HMRC.

The new rules aim to make inheritance fairer and encourage members to use their pensions for retirement income, as intended.

What counts as notional pension property?

• Any unused pension pot in a money purchase arrangement, for example, Additional Voluntary Contributions like BRASS or AVC Extra, or funds in a Defined Contribution section, such as IWDC.
• Funds in other pension schemes that haven’t been taken yet, including income drawdown arrangements.
• Lump sum death benefits paid to beneficiaries.
• The balance of any guarantee period for a pension or annuity already started.

What is excluded?

• Death in service benefits if the member was still working – these are exempt from Inheritance Tax.
• Lump sums paid to charities from unused pension pots or drawdown funds.
• Defined benefit pensions (except lump sums from a guarantee period). Pensions paid to a spouse, civil partner, children or dependants are also excluded.
• Trivial commutation lump sum death benefits under £30,000, paid in lieu of a small dependant’s pension.
• Any annuity bought with a pension pot (except the remaining guarantee period) as payments stop after death. Joint life annuities paid to a surviving partner are also excluded.
  
  

How do I make an Inheritance Tax payment to HMRC?

Personal Representatives can ask a pension scheme to hold back 50% of taxable pension benefits if they think Inheritance Tax will be due. They then have 15 months to tell the scheme to pay the tax directly to HMRC.

The Pension Representative is responsible for notifying and paying any Inheritance Tax due to HMRC.

Find out more

For guidance on inheritance tax, speak to an Independent Financial Adviser.

Liverpool Victoria (LV) has been chosen as the official partner to give RPS members access to financial advice. LV can be contacted on 0800 023 4187. This service is authorised and regulated by the Financial Conduct Authority.

You can also visit MoneyHelper for free, impartial advice backed by the government.