Inheritance tax changes explained as couple reassured they can still pass on pensions tax free

Steve Webb, former pensions minister and now partner at LCP has raised concerns about the potential complications arising from these changes after an email.

A reader posed a question about the impact of the inheritance tax changes on married couples with unused defined contribution pensions. They asked if a spouse would inherit the pension tax-free, similar to other assets like houses and savings.

The query also touched on whether the surviving spouse could draw on the pension at their marginal tax rate, and if the combined inheritance tax allowance would apply to any remaining pension upon the spouse's death.

Webb said that under the new system, married couples with unused defined contribution pensions can still inherit the pension tax-free and that the surviving spouse can then draw on the pension pot as usual, paying income tax on withdrawals.

Webb told This is Money: "Following the death of the spouse, the estate will be valued in the normal way – but now including pensions – and any remaining inheritance tax allowances would be applied to this total figure.

"But in terms of the practicalities of all of this, the new system will unfortunately be much more involved for grieving families."

Under the new rules, pensions will be included in the value of an estate for inheritance tax purposes. Personal representatives will also need to contact all relevant pension schemes of the deceased and get information on the value of remaining pensions and beneficiaries.

This data will then be input into a new online HMRC calculator to determine inheritance tax due and how the tax bill should be split between different pension providers.

Personal representatives must then notify each pension scheme of the calculation outcome.

Webb describes this process as "horribly bureaucratic", potentially causing significant delays in settling estates if one pension scheme administrator is inefficient, it could hold up the entire process.

He emphasised the need for HMRC to reconsider the practical implications before 2027. While the Chancellor's announcement was brief, implementing these changes is "a substantial task."

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Webb concluded by emphasising the importance of balancing the Chancellor's revenue-raising goals with the need to avoid additional hassle for families during an already difficult time.