Inheritance tax and pensions – changes coming in April 2027

Who needs to think about this?

If the total value of your estate, when including the value of your pensions, results in an inheritance tax liability where there wasn’t one before, then you should consider how to address this now.

Taking a simple example; if Mrs Smith had inherited from her late husband and now owns a house worth £800,000 and has savings of £150,000, which she wants to leave to her children, this would be tax free on her death. If we assume she has the full nil rate band (£325,000) and residence nil rate band (£175,000), as well as those transferrable from her late husband, then she can leave up to £1 million free of inheritance tax.

If, however, she has unused pension pots of £150,000 those sums are going to take the total estate over £1 million and the excess of £100,000 will be taxed at 40%. Inheritance tax will therefore be due of £40,000.

The administrative burden of the new rules

Personal representatives (PRs) dealing with administering estates will need to obtain valuations on pensions (alongside all the other assets) to enable them to complete the inheritance tax forms and look to pay inheritance tax within the deadline of six months from death if interest is to be avoided.

Whilst this sounds simple, it won’t be, and that six-month period will pass quickly.

Working out who to contact in terms of pension providers may take some time if the Deceased has left very little information.

How quick will pension providers be in providing information and valuations? 

Further legislation will be available later in the year providing more details, but we currently know that “if the pension scheme administrator cannot provide the value within 28 days of receiving the request, they must provide an estimated value”.  There is nothing wrong with an estimated value if that is all that can be provided at that time, but it does mean that the position will need to be clarified, and this will give rise to the need to go back to HMRC with a corrective account later to provide the accurate valuation. This takes time and may lead either to refunds being due, or further payments of inheritance tax needed. If more tax is to be paid, funds need to be available to cover this. We don’t yet know whether pension scheme administrators can reply in that time frame and how many estimates PRs will receive.

PRs also need to know who is benefitting from the pension

Most pensions are discretionary even when individuals have completed nominations and, as the recent technical note from HMRC reminds us, “until the trustees have made their decision, no beneficiary has an actual entitlement to the death benefits.”

PRs need to know if the benefits are going to a spouse or civil partner, and are therefore exempt from inheritance tax, or not.  It is suggested that PRs work with pension administrators to establish the position. Pension administrators will need processes in place to ensure they communicate promptly, and we do not yet know how this will work in practice.

The note says that “the split between exempt and non-exempt beneficiaries must be provided by the later of 28 days from the request or 14 days after beneficiaries are determined”. 

Again, set against these times frames is the six-month period from date of death ticking away, if interest is to be avoided.

Who is liable to pay the tax?

Personal representatives will be responsible for reporting and liable for paying any Inheritance Tax but, once the trustees have decided on a beneficiary, the beneficiary becomes jointly and severally liable with the personal representatives for any Inheritance Tax attributable to that pension.

How does the tax practically get paid?

There are various notices that will need to be given by the PRs to the pension scheme administrators. A withholding notice, for example, is to stop them distributing up to 50% of the pension whilst the tax position is resolved.

There is clearly a balance (or conflict) between a beneficiary of a pension receiving those funds (and they may need them to live on), and the PRs obtaining clarity on the total value of the Estate and what is due in terms of tax.

Tax being paid from the pension directly to HMRC

PRs and pension beneficiaries can issue a payment notice to the pension scheme administrator to request that they pay inheritance tax direct to HMRC.  There are specific requirements for this notice, and the pension scheme administrator should arrange payment within 35 days.

This is another period, after the various 28 day periods set out above, which should be considered within the six-month period from the date of death for paying IHT.  Some PRs don’t even start requesting valuations for a month or so after someone has died, or seek legal assistance, as they are dealing with a funeral and the immediate loss of someone close to them; so these time frames are tight.

Whilst representative bodies did request that this timescale was extended for pensions, it was not agreed by the government.

The recent technical note also recognises that some pension schemes have illiquid assets in the portfolios, e.g properties, and so may not be able to access funds. PRs and beneficiaries should work together to decide how best to pay the tax, and it may be from the rest of the Estate. Problems will arise when the pension beneficiaries and Will beneficiaries aren’t the same people.

There may be practical financial questions for the pension scheme administrators as to how to access funds to pay IHT.  Which assets should be used? How accessible are they?

Tax implications for pension beneficiaries

If the amount subject to inheritance tax changes, this will potentially impact the pension beneficiary and their Income Tax position.

Personal representatives will be responsible for informing beneficiaries of amendments and the potential impact on their Inheritance Tax and Income Tax position.

Pension beneficiaries will remain liable for any tax on newly discovered pensions.

Liability for Personal Representatives

As part of dealing with an Estate liable to Inheritance Tax, Personal Representatives should apply to HMRC for clearance.  If they receive this, they are not liable for tax arising on any pensions discovered later. However, they do need to show that they have made all reasonable and “best efforts” to track down all pensions. Our experienced solicitors can assist with these very important steps.

Why appoint a solicitor to help you?

Lifetime planning around the total value of assets.

You may find your estate is now taxable when it wasn’t previously and so you need to look at options around this, which may include lifetime gifting and taking financial advice. Our lawyers work with other professionals to ensure you receive detailed guidance and recommendations that reflect your personal circumstances.

Responsibilities as a PR

If there were ever a reason to instruct experts to assist you as Personal Representative, this will be it. After 6 April 2027, for any estates with non-exempt beneficiaries, and taxable estates with unused pension pots, you should be seeking specialist legal advice.  There are many risks and important implications that could be overlooked, leading to unwanted liabilities for PRs.

Should you have any concerns about Inheritance Tax liabilities, or you would like to discuss estate planning further, please contact our expert Private Client solicitors on +44(0)3333 231580 or email us here.