Should the tax be paid from pension assets
In practice, whether IHT is paid from the pension or other assets could depend on where the pension is invested and whether it will be chargeable to income tax. For instance:
- If the member dies before age 75 and the pension can be paid free of income tax, it may be beneficial to pay the IHT bill from other assets. This can allow more wealth to be retained in the tax-advantaged pension wrapper going forward.
- If a pension is chargeable to income tax, it will normally be preferable to pay the IHT from the pension (or money withdrawn from the pension). This means less of the pension suffers income tax later on.
- If pension funds are illiquid and can’t be sold quickly, it may be necessary to pay the IHT charge from other available assets. This mitigates the risk of incurring late payment interest on the IHT (charged at Bank of England base rate + 4%) when not paid within 6 months of death.
- If pension assets have dropped in value after death, it may be preferable to pay the funds from other assets to avoid realising a loss - particularly important as loss on sale reliefs aren’t available to a pension fund but can be available for other assets (see below).
IHT reliefs & exemptions
Following consultation, the Government confirmed that dependants’ scheme pensions, joint life annuities, death in service benefits and charity lump sum death benefits will be exempt from IHT.
For other pension death benefits, if the chosen beneficiary is a UK resident spouse or civil partner of the deceased member, the normal spousal exemption will apply and no IHT will be due.
Otherwise, pension death benefits will be chargeable to IHT, and these won’t benefit from valuable reliefs available to similar assets held in the wider estate:
- Business property/agricultural property relief - For this purpose, the member is treated as not owning the pension assets. As a result, neither business property relief nor agricultural property relief apply (for instance, where commercial property is held within a pension).
- Loss on sale reliefs – Again, the member is not treated as owning the pension’s assets, meaning IHT is chargeable on the full pension value at date of death. This is regardless of whether the funds have fallen in value by the time they have been awarded to a beneficiary.
Nominations, liquidity, and efficiency
The introduction of IHT to pensions means death benefit nominations and existing investments will need reviewing.
In some cases, children/grandchildren will be nominated to receive pension death benefits. Going forward, it may be beneficial to update nominations in favour of a spouse, benefitting from the spousal exemption – the spouse can then always pass on pension income to other family members using gifting exemptions such as normal expenditure out of income.
Where a spouse is present, consideration of how to utilise the nil-rate band of £325,000 will also come into question. This is apportioned between the chargeable estate and chargeable pension.
It is already common for Wills to award estate assets up to the value of the nil-rate band to descendants/trusts, with the residual to a spouse. In future, there may be a need to draft nominations in conjunction with Wills, ensuring that the nil-rate band is allocated appropriately across pension and estate assets to bypass the spouse. Age 75 could trigger a further review point, as income tax for any pension beneficiary will then become an additional factor.
If illiquid assets (i.e. commercial property, unlisted shares, closed funds) are held, consideration will be needed as to whether there are sufficient funds elsewhere available to cover any IHT charge. Accurate valuations may be difficult or expensive to obtain, so where possible, it may be helpful to allocate illiquid assets to a spouse to simplify the process.
Where pension death benefits are paid via discretion, it is a good idea to ensure that potential beneficiaries are made aware of the members intentions before death occurs. This can prevent unnecessary claims/challenges and help speed up the process. As late payment interest (currently 7.75% per year) accrues when IHT is not paid within 6 months of death, there will be a strong incentive to ensure a decision is made efficiently without delay.
Technical commentary
The inclusion of a pension within the estate for IHT purposes has the potential to unpick many carefully laid plans. Where IHT is a concern, a check to ensure that existing investments, nominations, and Wills remain appropriate will be a prudent first step.
Further detail on how the legislation is expected to operate in practice can be found in HMRCs technical note, published on 11 May 2026.
Important information
Please note this is for general information only and is based on LV's understanding of the relevant legislation and regulations and may be subject to change.
The tax treatment of benefits depends on individual circumstances and may be subject to change in the future.
The use of this document is at your own risk, and the content should not be used for the provision of professional advice.
LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.
