Finance Act 2026 paves the way for pensions to form part of an individual’s estate for IHT purposes

The Government first announced proposals to bring certain pension benefits in scope of IHT in its 2024 Autumn Budget. Paving the way for these changes, the Finance Act 2026 received Royal Assent late on 18 March, although the final Act is not yet available.

Lucy Dunbar, partner, comments: “The IHT changes will bring most unused pension funds and death benefits into scope of IHT in respect of deaths on or after 6 April 2027. The policy reasons underpinning this change include ensuring that pensions tax relief is being used for its intended purpose (namely, encouraging saving for later life) by removing the opportunity for individuals to use pensions for IHT planning.”

“Given existing exemptions and nil rate bands, Government estimates suggest that approximately 8% of estates will be caught by the changes each year. From an individual perspective, this means that the vast majority of estates will not, ultimately, be subject to IHT. In further good news, not only will death-in-service benefits payable from a registered pension scheme and dependants’ scheme pensions be exempt, so too will joint life annuities.”

“However, the new measures will impose onerous new obligations on pension schemes, not least by increasing information flows between them and personal representatives. Personal representatives can also require pension scheme administrators to withhold payment of certain benefits for up to 15 months and, subject to certain conditions being met, both PRs and beneficiaries can direct pension scheme administrators to pay any IHT due.”

“There is no doubt that the new Act sets the stage for a monumental shift in the tax treatment of pension benefits. With pension schemes administrators usually (but not always) the scheme trustees or managers, they will need to take steps to get ready for another starring role when the IHT and pensions curtain finally rises next April.”