Question to the HM Treasury:

To ask the Chancellor of the Exchequer, if her Department will make an assessment of the potential impact of the taxation of inherited pensions before transfer into trusts on the long-term financial security of disabled beneficiaries.

Certain types of trusts for vulnerable people, including disabled persons trusts, are exempt from inheritance charges which normally apply to other types of trusts. No inheritance tax is charged on payments made to a beneficiary from a disabled persons trust. These are longstanding rules and are not changing.

From 6 April 2027, most unused pension funds and death benefits payable from a pension will form part of a person’s estate for inheritance tax purposes. 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.

Following these changes, any unused pension funds or death benefits left to a disabled persons trust on the settlor’s death, will therefore be in scope for inheritance tax in the same way as other assets in the settlor’s estate, such as cash or property. This is the longstanding position for assets settled into a disabled persons trust following the settlor’s death.

The government estimates that more than 90% of estates will continue to have no inheritance tax liability following these changes and the transferable tax-free nil-rate bands mean that estates can continue to pass on up to £1 million without an inheritance tax liability.