Paying IHT On Unused Pension Fund After 5.4.27

Clocktower25

Reading through the Government Consultation Outcome dated 21st July 2025 it says that if a beneficiary takes the pension in full and pays the IHT charge themselves they can contact HMRC for a refund for any income tax paid on the IHT charge.

Example
All NRB and RNRB used, beneficiary is in the 40% income tax band.

£100,000.00 pension pot left to beneficiary.
They pay the IHT charge from their savings - £40,000.00
They claim a refund of £16,000.00 from HMRC 
This gives a IHT charge of 26% down from 40%

Am I missing something?

HappyHarry

That's not quite what it says.

It says;

£100,000 pot left to beneficiary.
Beneficiary draws £40,000 net to pay IHT bill.
Beneficiary can claim back the income tax that was paid to draw the £40,000 net.

Clocktower25

I understood the beneficiary can't draw any money until probate is granted and probate is not granted until the IHT charge is paid.

HappyHarry

Clocktower25 said:

I understood the beneficiary can't draw any money until probate is granted and probate is not granted until the IHT charge is paid.

No - the pension funds can be distributed and the IHT liable now falls on the pension beneficiaries. 

This is explained in annex A, stages 3 & 4 of the consultation.

It is going to be a huge headache for anyone involved - I imagine not many people will want to deal with an estate that needs to take into account unspent pensions.

poseidon1

Clocktower25 said:

Reading through the Government Consultation Outcome dated 21st July 2025 it says that if a beneficiary takes the pension in full and pays the IHT charge themselves they can contact HMRC for a refund for any income tax paid on the IHT charge.

Example
All NRB and RNRB used, beneficiary is in the 40% income tax band.

£100,000.00 pension pot left to beneficiary.
They pay the IHT charge from their savings - £40,000.00
They claim a refund of £16,000.00 from HMRC 
This gives a IHT charge of 26% down from 40%

Am I missing something?

Have to congratulate you on your perseverance, it's one hell of a document!

For those not so inclined to wade through the entire Q&A and responses, see below a (small) extract  relating to the mechanics of how it is proposed IHT will be paid by the estate PRs and/or pension pot beneficiaries. PRs job can be hard enough already when IHT arises, the proposed additional taxation of pension pots magnify the difficulties manifold.

OP as to your question, paragraphs 6 and 7 below infers you are correct. On your example it does indeed appear to be the case that there will be 40% income tax relief on £40k IHT on the £100k pension pot.  Have to admit makes me wonder if I am missing something?



''  .......Process for reporting and paying Inheritance Tax on unused pension funds and death benefits

A high-level explanation of the PR-led process is set out at Annex A.


In the technical consultation document, the government acknowledged that the main potential drawbacks with the PR-led model are liquidity challenges (if the PRs themselves do not have access to the relevant pension funds to pay the tax) and double taxation (for example, if the beneficiary draws down their inherited pension to reimburse the PRs for Inheritance Tax, and then also has to pay Income Tax on those funds at their own marginal rate).

To mitigate the liquidity challenges, PRs and pension beneficiaries (once appointed) will have several options to pay Inheritance Tax due on unused pension funds and death benefits, as follows:

pay directly from the free estate: PRs can pay the Inheritance Tax due on the entire estate — including the pension component — directly from funds in the free estate, then proceed to apply for probate. If the beneficiaries of the free estate and the pension beneficiaries are the same, they can then take their pension benefits in full. If the free estate beneficiaries and pension beneficiaries are not the same, PRs can use their existing legal right of reimbursement from pension beneficiaries under the Inheritance Tax Act 1984 to reclaim the value of the Inheritance Tax paid on the pension and distribute this to the beneficiaries of the free estate. HMRC will work with the pension industry to provide clear guidance and support for pension beneficiaries in respect of their Inheritance Tax liability, options for paying, and their responsibility to the wider estate. If pension beneficiaries take their pension benefits in full, they will be able to claim a repayment from HMRC of any Income Tax paid on the amount of the Inheritance Tax charge on their benefits

pension beneficiaries direct PSAs to pay: Alternatively, PRs can pay the Inheritance Tax due on the free estate and work with pension beneficiaries (once appointed) to pay the Inheritance Tax due on the pension component. The government will set up a new scheme through which beneficiaries can direct the PSAs to pay the Inheritance Tax on their behalf directly to HMRC. PSAs will inform beneficiaries that they will be liable for any Inheritance Tax and this payment option. If the beneficiary directs the PSA to pay, they will then receive the remaining benefits subject to Income Tax if appropriate

pension beneficiaries take their pension benefits in full and pay Inheritance Tax directly: Alternatively, if the beneficiary takes their benefits in full they can pay the Inheritance Tax directly and contact HMRC to arrange a refund for any Income Tax paid on the amount of the Inheritance Tax charge on their benefits

Income tax will not be due on the amount of relevant death benefits equal to any inheritance tax due on that pension. HMRC will ensure that there are mechanisms in place for pension beneficiaries to recover any overpayments of Income Tax, if needed.

Respondents highlighted the difficulty under the PSA-led process for pension schemes which have made significant investments into illiquid assets to raise sufficient liquid assets to pay the Inheritance Tax due on the pension. As set out above, under the PR-led process, PRs can pay the Inheritance Tax due on the entire estate, including the pension, directly from funds in the free estate. Alternatively, pension beneficiaries can pay the Inheritance Tax due on the pension directly to HMRC.

PRs are required to pay Inheritance Tax before they can apply for probate and distribute the assets in the estate. The government recognises the difficulties that PRs may face if they do not have sufficient liquid funds in the estate to pay the tax. There are several existing mechanisms to help PRs raise funds to pay Inheritance Tax. These include the Direct Payment Scheme, which can be used to transfer money from the deceased’s account(s) before probate is granted, and the ability to pay by the Inheritance Tax on certain assets that may take time to sell by annual instalments. Once the first instalment (and any others due when the plan is set up) has been paid PRs can proceed to apply for probate.

While these mechanisms will not allow PRs direct access to pension funds, they will help PRs to access sufficient assets in the wider estate to pay the Inheritance Tax due on the whole estate (including the pension component), or reduce the amount of tax to be paid before probate is granted. In certain circumstances, HMRC can allow the issue of a grant on credit to postpone payment of Inheritance Tax until after probate has been granted so that the PRs can access assets in the estate.

HMRC analysis suggests that PRs will, in most cases, be able to pay the Inheritance Tax due on the pension component from within the wider estate, particularly after the Inheritance Tax nil-rate bands have been applied. For estates with an Inheritance Tax liability, inheritable pension wealth tends to make up a relatively small proportion of the total estate value. HMRC estimates that, of the taxpaying estates affected by these reforms in tax year 2027 to 2028, the pension component makes up less than 5% of the net value of the estate in more than half of cases, and less than 60% of the estate in almost all cases.

We expect there will be a small number of cases where none of these payment options are suitable — for example, where there are insufficient funds in the free estate to pay the Inheritance Tax due on the pension, and the pension beneficiaries are not known or have not yet been appointed. PRs and beneficiaries (where known) should make all reasonable efforts to pay as much Inheritance Tax as possible before the 6-month payment deadline using one of the methods above. After this point, late payment interest will begin to accrue on any unpaid tax.

PRs’ personal liability is limited to the value of the assets which pass directly through the estate. In cases where it has genuinely not been possible to pay the Inheritance Tax due on the pension component from the wider estate, or for the pension beneficiaries to either direct the PSAs to pay or to pay HMRC directly, PRs will be able to speak to HMRC to agree how to proceed.

If unable to pay the Inheritance Tax due on the pension, PRs will need to wait for the pension beneficiaries to be appointed before the tax can be paid. At this point, the pension beneficiaries will become jointly and severally liable for the Inheritance Tax on the pension.

It is common for the value of assets within an estate to change. It will remain the PRs’ responsibility to inform HMRC of any amendments and they will be liable for any changes to Inheritance Tax as a result. Changes to the value of the estate may impact the amount of nil rate band available for the pension. These changes could affect both the Inheritance Tax and Income Tax position for pension beneficiaries. As set out in Annex A, PRs, supported by HMRC guidance and tools, will be responsible for informing pension beneficiaries of amendments and the impact on Inheritance Tax and Income Tax resulting from any amendments to the value of the estate.''

Clocktower25

Thanks for the explanation.

Is my original comment correct?

Is it possible to reduce the IHT charge to 26% by the beneficiary paying the IHT charge rather than the pension company paying 40% to HMRC

If so that is quite a saving.

HappyHarry

No unfortunately not.

As the above post from @poseiden1 says:  If pension beneficiaries take their pension benefits in full, they will be able to claim a repayment from HMRC of any Income Tax paid on the amount of the Inheritance Tax charge on their benefits.

So as per my post above, only the income tax paid in order to access the pension to pay the IHT bill can be reclaimed.

Clocktower25

Sorry, I am struggling to understand this.

Using my previous example.

Pension pot £100,000.00 taken in full, £60,000.00 put in a pension to grow.

Pay HMRC £40,000.00 IHT charge.

Reclaim £16.000.00 from HMRC

So beneficiary gets £84,000.00 HMRC gets £26,000.00



Or does taking their benefits in full mean taking it as cash and paying 40/45% income tax on the £100,000.00

HappyHarry

Or does taking their benefits in full mean taking it as cash and paying 40/45% income tax on the £100,000.00

Yes - that is exactly what it means.

The text is saying that if pension funds are withdrawn to pay the IHT bill, then the income tax paid on that withdrawal can be reclaimed.

Clocktower25

Oh I see.

Thanks for taking the time to explain.

I thought it was too good to be true!