The government has confirmed that it will bring pensions into the scope of inheritance tax (IHT), although it has made changes in response to industry feedback, deciding that lump sum death in service benefits are not to be brought into scope of the new IHT regime after all.

Chancellor, Rachel Reeves, previously announced plans for IHT to apply to unused pension assets from April 2027, although HMRC’s subsequent consultation on the technical detail of implementation went “much further”, suggesting IHT would apply to many death benefits too.

The proposals prompted concern within the pensions industry, as experts warned that the proposals could place unrealistic deadlines on pension schemes to decide who death benefits are paid to and too little time to pay tax to HMRC without triggering interest and penalties.

HMRC’s consultation response has since confirmed that all death in service benefits from registered pension schemes will be out of scope of IHT and the mechanism for collecting IHT on other pension benefits will be changed.

"Respondents highlighted that the scope set out in the technical consultation would lead to inconsistencies in the treatment of death in service benefits held in registered pension schemes and those held in non-pension trust structures," the government response stated.

"The government accepts these points and agrees that bringing death in service benefits into scope of IHT would not be consistent with the broader rationale of ending the use of pensions as a tax planning vehicle."

This change has been welcomed by those in the pensions industry, with LCP partner, Alasdair Mayes, stating: “It’s great to see that HMT and HMRC have listened to feedback and decided that lump sum death in service benefits are not to be brought into scope of the new IHT regime after all.

“These are not “unused pension assets” but a vital benefit to young families at a time of need and loss of a bread winner. Providing consistency across the public and private sector will I am sure be welcomed.”

This is not the only change, as the government's response revealed that while many respondents were not opposed in principle to bringing pension wealth into scope of IHT, most raised "significant concerns" with the proposal to make pension scheme administrators (PSAs) liable for reporting and paying.

The government said that although some of these issues were known at the time of announcement, the scale of the impact on PSAs and pensions beneficiaries became fully apparent during the consultation process.

In light of these responses, the government confirmed that it will not proceed with this proposed model.

Instead, personal representatives (PRs), who are already responsible for administering the rest of the estate, will be liable for reporting and paying Inheritance Tax on any unused pension funds and death benefits from 6 April 2027.

This is consistent with the current process for non-discretionary pension schemes, and certain other assets which do not pass directly through the estate but are in scope of IHT.

Canada Life managing director for retirement, Pete Maddern, who said that he was pleased that the government had listened and avoided the unintended consequences that would have come with making pension scheme administrators responsible for paying inheritance tax on pension funds and death benefits.

“Aligning with the existing process will help ensure that beneficiaries receive what they are owed without delay and mean that unnecessary burdens aren’t placed on personal representatives and families at an already difficult time,” he added.

However, AJ Bell head of public policy, Rachel Vahey, warned that whilst this may alleviate some of the problems with the initial proposal, as beneficiaries might be able to pay the whole IHT bill from other estate assets, it is "by no means creates a simple process".

“Bereaved and grieving families will still have to grapple with the additional complexity and confusion caused by adding unspent pension funds into the IHT liable assets," she stated.

"Rather than saving them from a tortuous process, this feels like HMRC is doubling down by pushing even more problems firmly onto the plate of the bereaved to solve."

Quilter pension specialist, Roddy Munro, also warned that while the policy is now settled and financial plans are already beginning to change to accommodate it, the details of its implementation carry significant implications for families, advisers and pension providers.

“Without further amendments, how the policy is eventually enacted risks turning a targeted tax reform into an administrative minefield,” he stated.

“What we could end up seeing is a massive transfer of private wealth back to the state. What’s more, while only a small fraction of estates will pay more tax, a far greater number will face needless complexity, delays, and stress – often at the worst possible time.

“While this certainty brings much more clarity, clients are already acting. Trusts and other legacy planning tools are moving into the mainstream. And while policy will continue to evolve, the need for robust, well-informed advice will be critical.”

Vahey also expressed disappointment that the government had not considered alternative proposals recently put forward by industry organisations, including recent proposals outlined by The Investing and Saving Alliance (TISA)and Oxford Economics.

“HMRC has blown its opportunity to bin the original proposals, stubbornly sticking with a system that will create confusion, complexity and additional costs for bereaved families,” she stated.

“Options were put forward by the industry which would have been far more straightforward than bringing unspent pensions into IHT , while still raising the same amount of tax.

“Although most savers will be unaffected and should not need to change their financial plans, some now face difficult choices about how best to arrange their finances.

“This change marks a significant shift in the tax treatment of pensions and anyone concerned about the proposals should think about speaking to a professional financial planner."

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