Everything you wanted to know about MaPS but were afraid to ask.

Posted on March 5, 2026 by henry tapper

Oliver Morley CBE

 

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Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Everything you wanted to know about MaPS but were afraid to ask.

  1. John Mather says:
    March 5, 2026 at 7.32

    A question that my ex-clients will be interested in is the tax on the tax of inherited pensions. The legislation seems to have changed, and my understanding is now: Is this correct?

    The Proposed New Charge-The Core Change

    From 6 April 2027, undrawn pension pots will be included in a deceased’s estate for inheritance tax purposes, regardless of whether the pension scheme administrator has discretion over death benefit payments.

    Previously, discretionary pension death benefits fell outside the estate.

    Exemptions preserved: death-in-service benefits and benefits passing to a surviving spouse/civil partner or registered charities.

    The Double Tax Concern
    The initial fear was that pension pots would face:

    IHT at 40% on death, and
    Income tax at up to 45% when eventually paid out

    This was thought to produce an effective combined rate of 67% (not 85%, as some feared).

    The Finance Bill addressed this by introducing a deduction mechanism under new section 567B ITEPA 2003.

    How the Deduction Works?

    When IHT has been paid on the pension, a deduction is allowed against the taxable pension income — equal to the lesser of the IHT paid or the income payment made to the beneficiary.

    Any unused IHT deduction carries forward to future tax years.

    Example

    Pension pot: £1,000; IHT charged at 40%: £400 The remaining pot paid as pension income: £600.

    When the £600 is paid out, the first £400 is sheltered by the IHT deduction, leaving only £200 taxable as income:

    Taxpayer Income Tax on £200 Total Tax (IHT + IT) Effective Rate: RateBasic rate (20%) £40 £440 44% Higher rate (40%) £80 £480 48% Top rate (45%) £90 £490 49%

    This appears to be far better than the feared 67%, though the legislation is complex relative to the additional revenue it will raise — particularly since the spouse exemption will eliminate the IHT charge in many cases entirely.

    The main beneficiary may simply be Treasury cash flow, as IHT is paid upfront by personal representatives shortly after death.

    How will MAPS advise?

    Reply

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