IHT – Adviser Updates

The UK Government has published draft legislation set to take effect from 6 April 2027, introducing the significant changes to the Inheritance Tax (IHT) treatment of pension interests. Consultation on this draft legislation is open until 15 September 2025.

The draft legislation provides that unused pension funds held within the following schemes, regardless of value, are to be taken into account in determining the value of the deceased estate.

• UK Registered pension schemes
• Qualifying non-UK schemes, which includes QROPS and other non-UK pension schemes
• Section 615(3) schemes

Importantly as detailed further below, QROPS pension funds will only be included for IHT purposes if the deceased was a Long Term UK resident or potentially if the Scheme is invested in UK situs assets.

The draft legislation also excluded dependants’ scheme pensions and death-in-service benefits.

Who’s liable for the reporting and payment of the IHT?

The draft legislation provides that the Personal Representatives (“PR”) of the estate are responsible for the computation, reporting and the payment of the inheritance tax due on the pension benefits. This reverses the original proposal of making UK Pension Scheme administrators responsible.

Beneficiaries and PRs will be jointly and severally liable for IHT, providing HMRC with the ability to recover unpaid IHT, from the beneficiaries if necessary.

The HMRC confirmed that a new digital reporting service will be launched, before April 2027 to simplify reporting and payment processes for estates and beneficiaries.

Payment of the IHT due on unused Pension Fund

The PR can pay the IHT directly to the HMRC for the full estate, including any IHT due in respect of the pension benefits (including QNUPS and QROPS where applicable). Alternatively, the IHT can be paid by the Beneficiaries. Importantly for UK pension schemes, beneficiaries also have the option to request that the Pension Scheme administrator pay the IHT due in respect of the pension benefit, on their behalf.  Importantly any IHT paid by the Scheme administrator is treated as an authorised payment and is not treated as Income.

If a beneficiary receives the pension proceeds first and pays the IHT directly, they can contact HMRC to arrange a refund of any Income Tax paid on the portion of those benefits used to settle the Inheritance Tax charge.

Death Benefits – Malta and Gibraltar QROPS

In summary, only QROPS members who are UK Long Term Residents will see the value of their QROPS fall within their estate for IHT purposes. QROPS are Non-UK Assets by definition and are expected to remain exempt* from UK IHT for Non-UK Long Term Residents.

Importantly, there is nothing within the draft legislation which creates any additional reporting requirements for QROPS providers. Once a member is outside of the QROPS 10 year reporting period, there is currently no requirement for the QROPS provider to notify HMRC upon the payment of death benefits.

We remind all advisers that there is no Maltese or Gibraltar Inheritance Tax or Income Tax payable on a lump sum death payment to beneficiaries from a QROPS, on the death of a Member.

Further advantages of QROPS in relation to death benefit include:

• The Lump Sum and Death Benefit Allowance (LSDBA) does not apply to QROPS
• UK Marginal Income tax on death benefits, does not apply unless the beneficiary is UK Tax resident.

*We are seeking clarity that using UK situs assets and UK platforms or custody accounts will not automatically trigger UK IHT for Non-UK Long Terms residents.

For more detail, please refer to: Draft Legislation, Explanatory Note, HMRC Consultation Responses

We will continue to monitor developments and provide further updates in due course.

The information provided in this article is for general informational purposes only and does not constitute financial, investment, legal or tax advice or any form of professional advice. We encourage you to seek advice from a qualified professional for any specific needs or concerns you may have. We make no warranties or representations about the accuracy, completeness, or reliability of the information provided in this email. Where links are provided to other sites and resources of third parties, these links are provided for your information only.