HMRC has released new information regarding the process of collecting inheritance tax (IHT) on pensions.
In the October 2024 Budget, the Chancellor revealed that most pension death benefits would be subject to IHT starting from 6 April 2027. However, it wasn’t until March 2026 that the necessary primary legislation was enacted. This is not the final step, as HMRC now needs to establish regulations to implement the new rules, followed by consultations to create “detailed guidance and other supporting materials.” The completion of these elements is expected by next spring, which is alarmingly close to the April 2027 implementation date.
The lengthy process underscores the challenges involved in creating a system that accommodates:
- The personal representatives (PRs), typically the executors named in the will,
- The administrators and trustees of the pension scheme,
- The beneficiaries of the pension death benefits, whether as a lump sum or income,
- HMRC, which may require both IHT and income tax on the pension benefits.
At the end of May, HMRC published a comprehensive ‘technical note’ outlining its perspective on the current situation. This document emphasized the considerable new responsibilities assigned to PRs:
IHT liability: PRs will bear the primary responsibility for reporting and settling any IHT owed on pension benefits. However, once the pension scheme confirms that an individual is entitled to a lump sum or pension, that beneficiary also becomes jointly and severally liable. This implies that if the PRs fail to pay the IHT owed, the beneficiary will be responsible for it.
Withholding funds: As anyone familiar with estate administration can attest, locating the deceased’s assets and determining their value at the time of death can be time-consuming. To mitigate this unavoidable delay, PRs will have the option to request that a pension scheme withhold up to 50% of a beneficiary’s entitlement as a safeguard against a potential IHT liability. The maximum duration for withholding is 15 months. However, a withholding notice cannot apply to beneficiaries classed as exempt (mainly surviving spouses and civil partners) nor to a limited range of excluded benefits (such as dependants’ scheme pensions, joint life annuities and death in service payments).
The new duties for PRs mean that you might wish to review who you have appointed as your executors. If you have no will, then the changes to IHT have given you another reason for making one.
HMRC technical note on IHT on pensions is available here.