Stephen McPhillips, Technical Sales Director, Dentons Pension Management Limited looks at the Consultation response from HMRC on the proposal to apply inheritance tax on unused pension pots announced in the Autumn 2024 Budget and how it has changed the impact on the industry.
Many regular readers of Professional Paraplanner will have been waiting eagerly for the response from His Majesty’s Revenue & Customs (HMRC) on the Consultation on pensions and Inheritance Tax (IHT) resulting from the Autumn 2024 Budget announcement. The Consultation period ended on 22 January 2025 and on 21 July 2025 the response was published on the Government’s website.
It’s fair to say that the response has not been universally welcomed by the pensions industry, judging by the press coverage immediately after its publication.
But is it fair for commentators to be critical of HMRC and the Government for the response?
Brief summary of the response outcome
Firstly, it seems abundantly clear that a lot of attention has been paid to the feedback from the 649 respondents. Some significant revisions have been made to the original proposals put forward back on 30 October 2024, whilst some suggested changes have not been adopted by the Government – more on this later.
The major revisions appear to be as follows:
1. Instead of Pension Scheme Administrators (PSAs) being responsible for paying IHT on each scheme’s respective share of an IHT bill (before any death benefits are settled), the Government has recognised that this was going to be wholly unworkable – from a timescales perspective alone, never mind any other aspects. From 6 April 2027, the deceased’s legal personal representatives (PRs) will be responsible for the payment of IHT. This is a fundamental change to the original proposals, and it is to be commended that the Government has accepted the industry’s feedback on this and adapted accordingly. Most PSAs will, I believe, have breathed a (possibly quiet and subdued) sigh of relief on this matter alone.
2. Instead of each pension scheme having to pay its proportionate share of an IHT bill (regardless of whether or not it has any liquidity to do this), the Government has stated that non-pension assets within the estate can be used to settle a pension scheme’s share, or the tax can be paid by beneficiaries directly – having taken their benefits. This liquidity issue was potentially going to be tricky for some schemes but it may have been swept away by the revised approach. Indeed, the Government states that, often, the pension scheme value is smaller than the deceased’s non-pension assets and that it therefore makes sense to allow non-pension assets to be used to pay IHT. This has got to be a very welcome outcome of the response too. What is unclear at this stage is whether or not this can work in reverse, i.e. could a well-funded pension scheme with liquid assets pay the IHT liability attaching to non-pension assets?
3. In order to avoid double-taxation on some beneficiaries where both IHT and Income Tax would be payable, the Government has stated that measures will be put in place to deal with this. This also addresses some well known concerns which were voiced by commentators immediately after the original proposals were announced.
Which suggestions were not taken forward?
1. A flat rate of tax applying to all pension scheme death benefits was rejected by the Government on the valid grounds that this would be patently unfair to members whose overall estates were below the IHT thresholds.
2. PRs will still have to settle the IHT bill within 6 months of the member’s death, rather than a much longer period such as 2 years as some respondents had suggested.
3. Those respondents who were hoping that the whole idea of bringing pensions within scope of IHT was going to be scrapped in favour of something else, were probably upset by the Government’s response.
What are the next steps?
The Government has recognised that a lot of work still needs to be done prior to 6 April 2027. It is stated in the response document that
“HMRC will continue to work with industry experts to develop and refine the PR-led process, and will publish further guidance tools and process maps to support PRs, PSAs and beneficiaries ahead of implementation in April 2027.”
Comments on draft legislation will be taken by HMRC until 15 September 2025.
Commentary
It has been interesting to see some of the initial reaction by some commentators, who appear to be unhappy with the Government’s response. However, things could have been far worse for the pensions industry and, potentially, pension scheme members. For example, the Government could have simply thanked all 649 respondents for their input but then pressed ahead with its original proposals. Thankfully, we’ve not had that happen and the Government has clearly listened and revised its proposals for the mechanics of bringing pensions within scope of IHT (whilst rejecting some suggestions with an explanation of why it has done so).
Of course, in an ideal world, bringing pensions into IHT wouldn’t happen, but it is happening – and HMRC was clear on this in the original consultation (which was never about whether or not it was a good thing to do). What we’ve got now is a recognition that the biggest issues raised by the industry were very real issues affecting the mechanics and timescales of the process, and the Government has adapted the proposals accordingly.
There is clearly still a lot to come in terms of finer and final detail, but, in the meantime, any clients who have sound (but perhaps illiquid) scheme investments may also breathe a sigh of relief that they may not have to consider disposing of these in order to create liquidity to settle a pension-related IHT bill. As ever, clients will benefit from taking professional financial advice and this latest development reinforces this, given the range of options which will exist.
Main image: tom-chen-w3mEcHyuk_E-unsplash
