Pensions and Inheritance Tax: Death & Taxes

On 21 July 2025 draft legislation for the Finance Bill 2025-26 was published. The draft legislation included the proposals for bringing pension schemes within the scope of Inheritance Tax.

On 21 July 2025 draft legislation for the Finance Bill 2025-26 was published. The draft legislation included the proposals for bringing pension schemes within the scope of Inheritance Tax.

Background

In the 2024 Autumn Budget, the Government announced its plans to bring most pension schemes within the scope of inheritance tax. Currently, except for “non-discretionary” pension schemes (such as NHS schemes), funds held within a pension do not form part of a deceased person’s estate for inheritance tax. What this means in practice is that no inheritance tax is paid on those funds on death.

The Government believes that this treatment has distorted the use of pensions from a vehicle intended to fund retirement, to one used more for tax planning. It hopes to tackle this by bringing all pensions within the scope of inheritance tax from 6 April 2027. It is estimated that the change will mean 10,500 more estates will be brought within the scope of inheritance tax in the tax year 2027/28 alone, with a further 38,500 liable to pay more tax.

Which pensions will be affected?

In short, any pension scheme that is registered with HM Revenue & Customs is potentially within the scope of the proposed new rules. Pension schemes (whether based in the UK or overseas) that are not registered with HM Revenue & Customs are already included within a person’s estate on death.

The new rules will cover “registered pension schemes”, which broadly means schemes which are recognised by and registered with HM Revenue and Customs. This will cover almost every UK pension. However, the rules will also apply to schemes such as Qualifying Non-UK Pension Schemes (QNUPS) (which also includes Qualifying Registered Overseas Pension Schemes (QROPS)). An exclusion remains for any payments made by an employer in respect of death in service benefits.

Implications and options

Whether inheritance tax is payable will depend on the overall gross value of the estate (including any pension as above), less any liabilities and available allowances.   The current inheritance tax rate is 40%. Income tax is payable on any lump sums over the tax-free allowance (defined pension schemes) so depending on which income tax band an individual falls into, considering any pension withdrawal it may be more tax efficient to use the fund in this way, providing you do not save/gift but rather spend that money.

The nomination for payment of the pension pot will still be in place so if it is left to a spouse or civil partner then the full exemption from Inheritance Tax will still apply.  Nominations can usually be amended at any time so if the nomination is in favour of a non-exempt beneficiary this should be reviewed and possibly changed shortly before April 2027.

Historically, people with a range of assets have not drawn down from their pension pot due to its tax-free status but now it is worth considering drawing an income.  If this income is surplus to everyday needs, it can then be used to make regular gifts to take advantage of the normal expenditure out of surplus income exemption.

A further option is to take a drawdown from the pension.  Up to 25% can be taken as a tax-free lump sum which maybe spent or invested in other tax effective assets.

At Anthony Gold Solicitors, we provide clear, tailored advice to help you:

• Identify potential tax liabilities and understand how inheritance tax will affect your estate.

• Utilise available reliefs and exemptions to reduce or remove inheritance tax.

• Plan for the future with wills, trusts, and gifting strategies that ensure your estate is protected.

Effective tax planning isn’t just for the wealthy, it is for anyone who wants to secure their family’s financial future.

Our expert team is ready to help you protect your assets and secure your family’s future. Contact us today to discuss your inheritance tax planning needs.

Call us on 020 7940 4060 or email WTE-NCEs@anthonygold.co.uk to arrange a consultation.

Disclaimer: This article is designed to summarise the proposals in the draft finance bill 2025/26. Anthony Gold Solicitors are not qualified to give financial advice including in relation to pensions, financial advice should be sought from an appropriately qualified financial advisor.