Changes to Inheritance Tax on pensions

Death grants paid via the Local Government Pension Scheme are currently out of scope for inheritance tax.

However, from 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person’s estate for Inheritance Tax purposes. This includes death grants paid via the LGPS (but not those paid for members who die whilst still working)*.

Under the new proposals, it will be the responsibility of the deceased’s personal representative to obtain the value of certain death benefits payable from any former pension arrangements. The personal representative will then calculate whether inheritance tax is due on the member’s estate, using an HMRC online calculator. Where inheritance tax is due, the personal representative must provide details to the relevant pension schemes. It will be for pension administrators to calculate the tax due, deduct it and pay it across to HMRC, before paying the death grant to the appropriate dependant.

If the pension scheme member dies before 6 April 2027, then the current rules will apply even if pension benefits are paid to their beneficiaries after this date.

* It’s important to note that many LGPS death grants would continue to be paid without any tax deducted because the value of the estate is lower than the threshold for inheritance tax.