In last October’s Budget, the government had announced, in fairly broad terms, that they would be bringing certain unused pension funds into the scope of IHT on the death of the Member of the scheme, with effect from 6 April 2027.

This charge is intended to deter individuals from retaining funds within their pension schemes in order to benefit from the current IHT exemptions (whilst also deferring income tax charges), with a view to the value passing to the next generation after their death. The policy is also intended to make the IHT treatment consistent across all types of pension scheme, although it does appear that certain unapproved pension schemes are to remain outside the scope of these rules.

Following the Budget, there was a consultation period, focusing primarily on how the IHT liability should be reported and paid. Draft legislation (as part of Finance Bill 2025-26) has recently been published (on 21 July).

The key points of the new proposals are as follows:

Who will the new rules apply to?

The rules will apply to Members of UK registered pension schemes, Qualifying Non-UK Pension Schemes (QNUPS) and s.6.15(3) schemes.
A QNUPS is a scheme that meets the requirements of the QNUPS regulations, which were introduced with effect from April 2006, primarily to ensure that Qualifying Recognised Overseas Pension Schemes (QROPS), which largely mirror UK registered pension schemes, could benefit from IHT exemption in the same way as UK pension schemes. However, in practice, QNUPS have become a” product” in their own right and following the introduction in April 2017 of more punitive IHT legislation in respect of UK residential property, they have become more widely used as IHT planning vehicles.
A s.615(3) scheme is broadly an occupational scheme set up by an overseas business for its employees who work outside the UK. Such schemes are currently exempt from IHT.
Some pre-6 April 2006 FURBS (broadly unapproved occupational pension schemes) may currently benefit from a “grandfathered” exemption from IHT on the Member’s death and it appears that this will remain in place. However, such schemes could potentially still be exposed to IHT on the Member’s death if no benefit have been taken as a result of the “omission to exercise a right” provisions, so careful consideration is needed.

On what basis will IHT be charged?

The new IHT rules will operate by treating the Member of the pension scheme as being beneficially entitled to the assets held for the purpose of the scheme immediately prior to his death to the extent that those assets can be used to pay relevant death benefits.
A relevant death benefit will include pensions and lump sums but specifically excludes any death in service benefits or a dependents scheme pension i.e. a pension paid after the death of the Member to any of his dependents (typically a spouse, a child aged under 23 or another financial dependent) under a UK registered pension scheme.
The assets of the pension scheme will be comprised in the Member’s estate on death. The extent of the IHT exposure (at the usual rate of 40% to the extent the value of the Member’s chargeable estate exceeds the nil rate band) will depend on the residence position of the Member and the situs of the assets held in the pension scheme.
It is more likely to be the case that Members of a QNUPS or a s.615(3) scheme will be non-UK resident and if the Member is not a Long-Term Resident (LTR) at the time of his death, only UK situs assets (with a few exceptions) held in the pension scheme (or foreign assets deriving value from UK residential property, such as shares in a property holding company) should be subject to IHT (subject to some exclusions for UK assets).

Exemptions from charge

The legislation enables the spousal exemption to apply in respect of value passing from the pension scheme to the Member’s spouse or civil partner, notwithstanding that the spouse/civil partner may not become immediately entitled to death benefits or that the payment of death benefits to the spouse/civil partner may be at the discretion of the trustee of the pension scheme.
The exemption from charge for payments to charities or registered clubs will also be available.
However, the assets of the pension scheme are specifically excluded from being eligible for exemption from IHT under the Business Property Relief and Agricultural property Relief provisions.

Who pays the liability?

The persons liable for the IHT payable on the Member’s death include the Member’s personal representatives (PRs). Where the PRs pay the IHT on any assets of the pension scheme, they can recover the tax from any person in whom the assets are vested. This could be the trustee of the pension scheme or a death beneficiary who has received the assets (unless the PRs can deduct the tax from payments being made to that beneficiary from the estate).
For a UK registered pension scheme, a death beneficiary in whom property has vested can notify the scheme administrator to pay the IHT attributable to the assets received on their behalf (and such a payment will be treated as an authorised member payment, so will not give rise to an unauthorised payment charge).
The trustees of UK registered pension schemes or s.615(3) schemes are not liable for the tax (but the trustees of a QNUPS are not excluded from being liable).
Where taxable pension income arises to a beneficiary as a result of a relevant death benefit being received from the pension scheme, and the beneficiary (rather than the PRs) has paid IHT on the death benefit (or the Member’s PRs have paid the IHT and passed the burden to the beneficiary by deducting it from assets distributed from the estate), a deduction is available to the beneficiary in this respect for UK tax purposes from the pension income.

When do the rules take effect?

The new rules are to take effect for transfers of value (i.e. on the death of the Member of the pension scheme) that occur on or after 6 April 2027.
The draft legislation does not impact the current exemption from trust-based IHT charges (10-year charges and exit charges) available to UK registered pension schemes, QNUPS and s.615(3) schemes, and this appears to be remaining in place.

Planning considerations

Individuals with pension schemes (whether in the UK or offshore) should seek professional advice regarding the implications of the new IHT rules to enable them to consider their position and the options available.
The LTR status of pension schemes members (especially those who are older or in poor health) should be established to ascertain whether IHT exposure is likely on death.
For those schemes with Members who are not LTRs, the investment strategy should be reviewed, as the holding of most UK assets (or assets deriving value from UK residential property) could result in IHT exposure on the Member’s death. For those wishing to retain such assets, advice should be sought regarding the potential benefits and implications of alternative investment strategies or re-structuring.
Long term Guernsey resident members of Guernsey RATS (which are likely to be QNUPS or QROPS) should be able to avoid IHT exposure with the correct investment strategy.
Under normal IHT principles, it should be possible for UK assets to be held in pension schemes with non-LTR members in the form of Authorised Unit Trusts (AUTs) or Open-ended Investment Companies (OEICS) without causing IHT exposure on the Member’s death.
As the Member will be treated as beneficially entitled to the assets of the pension scheme on death, the holding of UK gilts which are FOTRA (Free of Tax to Residents Abroad) Securities in the scheme should not give rise to IHT exposure if the Member is non-UK resident at the time of death.
Members of retirement age that are likely to come within scope of the new IHT charge (particularly those that are LTRs) will need to consider the option of taking benefits from their pension schemes and potentially, estate planning strategies, for example making outright gifts to family members, which should have no IHT implications providing the Member survives 7 years (and would result in a reduced IHT if the Member survives more than 3 years but less than 7).
Withdrawals from pension schemes are likely to have income tax implications, whether in the UK or in the Member’s country of residence and professional advice should be sought accordingly.

If you would like to discuss the expected changes, please contact Mandy Connolly, our Head of Tax Technical: mandy.connolly@lts-tax.com