Question to the HM Treasury:

To ask the Chancellor of the Exchequer, whether she has assessed the potential impact of making pensions subject to (a) inheritance tax and (b) probate on bereaved families.

Most unused pension funds and death benefits will be included within the value of a person’s estate for inheritance tax purposes from 6 April 2027. This removes distortions resulting from changes that have been made to pensions tax policy over the last decade, which have led to pensions being openly used and marketed as a tax planning vehicle to transfer wealth, rather than as a way to fund retirement. These reforms also remove inconsistencies in the inheritance tax treatment of different types of pensions.

Estates will benefit from the normal nil-rate bands, reliefs, and exemptions available. For example, the nil-rate bands mean an estate can pass on up to £1 million with no inheritance tax liability, and the general rules mean any transfers to a spouse or civil partner are fully exempt from inheritance tax.

The reforms are forecast to raise £1,460 million in 2029-30. The independent Office for Budget Responsibility certified this costing at Autumn Budget 2024.

Most estates will continue to have no inheritance tax liability following these changes. The Government estimates that, out of around 213,000 estates with inheritable pension wealth in 2027-28, 10,500 estates – or around 1.5 per cent of total UK deaths - will become liable to pay inheritance tax where this would not previously have been the case. Around 38,500 estates will pay more inheritance tax than would previously have been the case. Unlike the revenue forecast, these figures do not take into account potential behavioural changes following the announcement of these measures and are illustrative.

An assessment of impacts was included in the recent technical consultation on the processes required to implement these changes. This can be found at www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment#part-4-assessment-of-impacts.

In accordance with standard practice, a tax information and impact note will be published alongside the draft legislation before the relevant Finance Bill.