Inheritance Tax

From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of a deceased person’s estate for Inheritance Tax (IHT) purposes. The changes, legislated for in the Finance Act 2026, represent a significant change to the tax treatment of pensions on death.

Individuals with significant pension savings should review their estate plans carefully. Beneficiaries inheriting unused pension funds or death benefits may now face an IHT charge,

Some benefits will remain excluded, including qualifying death-in-service benefits and dependants’ scheme pensions. Existing exemptions, including those for qualifying transfers to a spouse or civil partner, may also apply.

The changes will affect how estates are administered:

• Personal representatives will be responsible for reporting and paying any IHT due on pension funds brought within the estate.
• Pension providers will need to share valuations and beneficiary information to help calculate the tax due.
• Beneficiaries may be jointly and severally liable with personal representatives for IHT attributable to pension benefits they receive.

Taxpayers should consider reviewing their pension arrangements, beneficiary nominations and wider estate plans before April 2027. Keeping clear records of pension schemes and ensuring that personal representatives can identify them may also help simplify estate administration.

HMRC is contacting some trustees after identifying possible errors in recent Trust and Estate tax returns relating to the type of trust being reported.

The latest HMRC compliance campaign focuses on trusts where box 8.15 of the Trust and Estate Tax Return was ticked to indicate that the trust is not an accumulation or discretionary trust. HMRC says its records suggest that some of these trusts may in fact fall within this category and could therefore have been taxed at the wrong rates.

Accumulation and discretionary trusts generally pay Income Tax at special rates of 39.35% on dividend-type income and 45% on other income, compared with lower rates for many other trusts. Some discretionary trusts are exempt from the special trust rates.

Trustees receiving a letter should review each relevant tax return and respond to HMRC by 2 November 2026. If the returns are correct, HMRC should be told. If additional tax is due for 2024-25, the return should be amended and the tax paid. Earlier years may require a voluntary disclosure to be made. There may be interest to pay and, depending on the circumstances, a penalty may also be due.

Trustees should also check that the trust's details on the Trust Registration Service remain accurate. HMRC requires trustees to keep relevant information up to date, including changes to beneficiaries.

If you receive one of these letters we can help you review your position and advise on the appropriate action.

After someone dies, the beneficiaries may find that the way an estate has been distributed does not reflect their wishes or the family’s circumstances. A Deed of Variation can allow beneficiaries to change how inherited assets are passed on and, in some cases, can help reduce the amount of tax payable. It is important to note that any beneficiaries who would receive less as a result of the changes must agree to the alteration.

A Deed of Variation (also known as a deed of family arrangement) allows beneficiaries to redirect all or part of their inheritance. This could include passing assets to another family member, changing who receives certain assets, or placing assets into a trust.

For tax purposes, where the required conditions are met, HMRC treats the variation as if it had been made by the person who died. This means the redirected assets are generally treated as passing directly from the deceased rather than from the original beneficiary. This can be useful for Inheritance Tax planning and may also have Capital Gains Tax benefits.

To be effective for tax purposes, the variation must normally be made within two years of the date of death. It must be in writing and contain the required statements confirming that the relevant tax rules are to apply. All beneficiaries whose interests are affected must agree to the changes.

A Deed of Variation cannot be used simply to avoid tax after an inheritance has already been received. Before making any changes, beneficiaries should consider the wider tax and family implications.

Most lifetime gifts are treated as potentially exempt transfers (PETs) for Inheritance Tax (IHT) purposes. In general, these gifts become fully exempt if the donor survives for seven years after making the transfer. If death occurs within seven years, the gift may become chargeable, with taper relief potentially reducing the tax rate depending on how long the donor survives after the gift.

However, different rules apply where the donor does not fully give up the benefit or “enjoyment” of the gifted asset. These are known as gifts with reservation of benefit (GWROB).

A GWROB arises where an individual transfers an asset but continues to benefit from it, meaning the gift is not an outright gift and is not usually exempt for IHT purposes. A common example is where a person gives their home to family members but continues to live there rent-free.

Where a reservation of benefit exists, the asset is generally still treated as part of the donor’s estate for IHT purposes, regardless of how long they survive after making the transfer. The value is typically assessed at market value at the date of death.

The rules can be avoided in some cases if the donor pays full market rent for continued use of the asset, thereby removing the retained benefit.

In contrast, where a genuine PET is made without reservation and the donor survives seven years, the gift falls outside the estate for IHT purposes and taper relief may apply if death occurs within the seven-year period.

Making gifts during your lifetime can be an effective way to reduce the value of your estate for Inheritance Tax (IHT) purposes.

One of the most commonly used exemptions is the annual exemption. This allows an individual to give away up to £3,000 each tax year without the gift forming part of their estate for IHT purposes. If the exemption is not used in full, any unused amount can be carried forward to the following tax year, although only for one year. This means that someone who made no qualifying gifts in 2025-26 could potentially give away up to £6,000 in 2026-27 free of IHT.

There is also a useful exemption for small gifts. You can give as many gifts of up to £250 per person each tax year as you wish, provided no other exemption has been used for the same individual. This is known as the small gift allowance.

Special rules apply to wedding and civil partnership gifts. Parents can give up to £5,000 to a child tax-free, grandparents and great-grandparents can give up to £2,500, and anyone else can give up to £1,000. In many cases these exemptions can be combined with the annual exemption.

Another valuable relief covers gifts made out of surplus income. There is no fixed monetary limit, but the gifts must form part of normal expenditure, be made out of income rather than capital, and leave the donor with enough income to maintain their usual standard of living. This exemption can be very useful for individuals with excess pension or investment income who wish to help children or grandchildren on a regular basis. Keeping clear records is important, as HMRC may ask for evidence that the conditions have been met.

Gifts between spouses or civil partners are generally exempt from IHT, provided both parties are permanently domiciled in the UK. Gifts to charities are also normally exempt.

The settlements legislation is designed to ensure that where a settlor retains an interest in settled property, the income arising is treated as the settlor’s income for all tax purposes. A settlor will be treated as having retained an interest where the settlor, or their spouse or civil partner, can benefit from either the income or the underlying property.

In general terms, the settlements legislation may apply where an individual enters into an arrangement which diverts income to another person, resulting in a tax advantage. Such arrangements typically involve an element of “bounty” and are not fully commercial or made at arm’s length.

The legislation is particularly relevant where:

• there is an element of bounty, or
• the arrangement is not on commercial terms, or
• it is not at arm’s length, or
• in the case of a gift between spouses or civil partners, the gift consists wholly or substantially of a right to income.

However, there are a number of everyday scenarios where the settlements legislation will not apply. Following extensive case law in this area, HMRC guidance and judicial decisions indicate that where there is no element of bounty, or where there is an outright gift between spouses or civil partners that is not wholly or substantially a right to income, the legislation will not generally be applied.

The 7-year gift rule is still an available option for those making lifetime gifts, offering a way to potentially reduce Inheritance Tax (IHT) liability. Most gifts made during a person’s lifetime are not immediately subject to tax. These transfers, known as ‘potentially exempt transfers’ (PETs), become fully exempt if the donor survives for more than seven years after making the gift.

If the donor dies within three years of the gift, the transfer is treated for IHT purposes as if it were made on death. A tapered relief applies if death occurs between three and seven years after the gift. 

The effective tax rates on the amount exceeding the nil-rate band are:

• 0–3 years before death: 40%
• 3–4 years: 32%
• 4–5 years: 24%
• 5–6 years: 16%
• 6–7 years: 8%
• 7 or more years: 0% 

Tapered relief cannot reduce tax on lifetime chargeable transfers below the amount initially chargeable, so it does not benefit transfers within the nil-rate band.

It is strongly recommended to keep a record of all PETs, exemptions used, and details of any regular gifts made out of surplus income, ensuring accurate tracking for future IHT planning.

As a general rule, someone who inherits property, money or shares is not liable to pay tax on the inheritance itself. This is because any Inheritance Tax (IHT) due is normally paid out of the deceased’s estate before assets are distributed to beneficiaries. However, the recipient may be liable to Income Tax on any income generated after the inheritance (for example, dividends from shares) and to Capital Gains Tax on any increase in value of the assets from the date of inheritance.

An important exception applies to gifts made during a person’s lifetime. These are known as Potentially Exempt Transfers (PETs). Such gifts become exempt from IHT if the donor survives for more than seven years after making the gift. If the donor dies within three years, the gift is treated as part of the estate on death for IHT purposes.

Taper relief may apply where death occurs between three and seven years after the gift, reducing the amount of IHT payable. In some cases, individuals take out insurance policies, such as seven-year term assurance, to cover any potential IHT liability during this period.

The position is more complex where the donor retains some benefit from the gifted asset. For example, gifting a house but continuing to live in it rent-free is treated as a ‘gift with reservation of benefit’. In such cases, the asset may still be subject to IHT, even if the donor survives for more than seven years. Additionally, IHT may arise if inherited assets are placed into a trust and the trust is unable to meet the tax liability.

The government recently announced significant changes to the planned reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR). The threshold for 100% relief will be increased from £1 million to £2.5 million when the changes take effect from 6 April 2026. The change will be introduced via an amendment to the Finance Bill 2025 with relief reduced to 50% on qualifying assets above the new level.

Spouses or civil partners will be able to pass on up to £5 million of qualifying agricultural and business assets between them free of inheritance tax, in addition to the existing nil rate bands. The transferable allowance will also apply to surviving spouses or civil partners who were widowed before the new policy was announced.

These changes adjust the reforms first announced at Autumn Budget 2024, which had attracted strong criticism from the farming community and rural businesses over the potential impact on small farms and family-owned enterprises. By raising the threshold, the government aims to significantly reduce the number of estates affected by higher inheritance tax charges, ensuring that the reforms are focused primarily on the largest estates.

The government estimates that around 85% of estates claiming APR in 2026–27, including those also claiming BPR, will pay no additional inheritance tax as a result of these changes.

Shares designated as “not listed”, such as those traded on AIM, will attract BPR at a flat rate of 50% (reduced from 100%) from April 2026. This measure was unaffected by the latest announcement.

The 2027 reforms will shift more responsibility to personal representatives, who may need to manage withholding arrangements and settle any IHT before pension benefits are released.

From 6 April 2027, most unused pension funds and death benefits will be included in IHT, meaning that more pension assets could be taxed when someone dies. This is a major change from the current rules, which largely exclude these funds from IHT.

Individuals with significant pension savings should review their estate plans carefully. Under the new rules, beneficiaries could face an IHT charge on inherited pension funds. Responsibility for reporting and paying this tax will fall on personal representatives, not the pension scheme administrators.

There are some important exceptions. Death-in-service benefits from registered pension schemes and dependants’ pensions from defined benefit or collective money purchase schemes will continue to be exempt from IHT.

It was announced as part of the Budget 2025 measures that from 6 April 2027, if a deceased person’s estate is expected to owe IHT, their personal representatives can instruct the pension provider to withhold 50% of taxable pension‑death benefits for up to 15 months. They must then pay any IHT due to the tax authorities before releasing the rest to beneficiaries. This does not apply to exempt benefits, small pots (under £1,000) or ongoing annuities. Personal representatives will also be discharged from liability for pensions discovered after they have received clearance from HMRC.