New Inheritance Tax rule change makes it harder for grieving families when a loved ones dies

Scottish Sun

24-07-2025

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A HUGE change to Inheritance Tax and pension has been confirmed this week in a blow to grieving families.
The Government has confirmed that it will bring pensions into the scope of Inheritance Tax from April 6, 2027.
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New Inheritance Tax rules will make it harder for grieving families to deal with a loved one's estate after they pass away
Credit: Getty - Contributor
Currently, money that is left in your pension after you pass away can be passed on to a loved one without needing to pay Inheritance Tax.
But the loophole meant pensions were being used to avoid Inheritance Tax, instead of planning for retirement.
The plans, which were first announced last October, are expected to pile more pressure onto grieving families.
Loved ones of the deceased will now need to report and pay any Inheritance Tax on money left in pension funds and death benefits.
But under previous proposals it would be up to the executor of the estate to find out how much money was left in each pension and calculate how much Inheritance Tax would be due.
The measures will also force thousands of families to pay Inheritance Tax for the first time, while reducing the amount of money they will receive from a loved one.
The government estimates that of around 213,000 estates that will inherit pension wealth in 2027/28, around 10,500 will now be forced to pay Inheritance Tax.
Meanwhile, approximately 38,500 will have to pay more death duties than would have previously.
As a result, the average Inheritance Tax bill is expected to increase by around £34,000.
The news comes as Inheritance Tax receipts for April to June 2025 hit £2.2billion, which is £0.1billion higher than in the same period last year.
How does Inheritance Tax work?
Inheritance Tax is currently charged at 40% on the property, possessions and money of someone who has died if they are worth more than £325,000.
Fewer than one in 20 estates currently pay death duties as most fall below this threshold.
But the tax is forecast to bring in around £9.1billion in 2025-26.
Under the plans pensions will form part of an estate over £325,000 too.
What are the different types of pensions?
WE round-up the main types of pension and how they differ: Personal pension or self-invested personal pension (SIPP) - This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- This is probably the most flexible type of pension as you can choose your own provider and how much you invest. Workplace pension - The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%.
- The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out. These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. Final salary pension - This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year upon retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore.
- This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year upon retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore. New state pension - This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you'll need 35 years of National Insurance contributions to get this. You also need at least ten years' worth to qualify for anything at all.
- This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you'll need 35 years of National Insurance contributions to get this. You also need at least ten years' worth to qualify for anything at all. Basic state pension - If you reach the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £156.20 per week and you'll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
The change could cause a huge shift in how people plan for retirement and spend their savings.
Julie Hammerton, managing partner at Hymans Robertson Personal Wealth, said: 'With pensions coming into the Inheritance Tax Regime from April 2027, it's more likely pensions will be accessed for an income in retirement, rather than a means through which wealth can be passed on to future generations.'
She added that the changes may change the order in which people access their long-term savings.
Meanwhile, it could cause pensions to be 'spent' more in retirement or could cause more gifting of withdrawn pension funds to dependents.
She added that it may also cause an uptick in annuity purchases, which give you a guaranteed income when you retire for the rest of your life.
This is because annuities remove pension pots from the deceased person's estate.
Meanwhile, former pensions minister Steve Webb has warned that the measures could make it harder to wind up a person's estate.
'The person dealing with the estate will need to track down all of the pensions held by the deceased which may have any balances in them, contact the schemes, collate all the information and put it into an online calculator and then work out and pay the Inheritance Tax bill,' he said.
'All of this has to be done before a probate application can be made, potentially substantially slowing down the process of winding up an estate.'
Probate is the legal process of dealing with a person's death.
Obtaining probate itself can take many months, which means finalising the financial affairs of a loved one can be a drawn out process.
Steve Webb added that complications will no doubt arise when a family member can't track down all of the deceased person's pensions.
They may also face complications if a provider is slow to give the information needed to work out the Inheritance Tax bill.
He added that HM Revenue and Customs (HMRC) may need to consider the rules around the penalties for paying Inheritance Tax late to make sure that grieving families are not hit with fines due to delays that are not under their control.
Unmarried partners could also be at a disadvantage due to exemptions for estates, which mean married couples can pass wealth on to one another tax-free.
What will the new process be?
According to the the Government's consultation, where the deceased person has one or more pensions which form part of the estate, the process will be as follows from next April:
Loved ones already need to report and pay Inheritance Tax on the deceased's estate, including for certain pension schemes.
They will now need to report and pay the Inheritance Tax due on discretionary pensions but all parties will need to work together to do this.
Personal representatives will need to collect and share information from all the deceased's pension schemes and pension beneficiaries.
They already need to contact all the pension schemes, but will now need to collect information if needed for filing an Inheritance Tax account.
The loved one will also need to report the amount of tax attributable to each pension scheme.
HMRC said it will give family members, pension scheme administrators and beneficiaries clear guidance, a calculator to advise if Inheritance Tax is due and a straightforward system to pay the tax liability.
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