Pensions and Inheritance Tax: More clarity on the 2027 rule changes

The Government has provided further detail on how the new Inheritance Tax (IHT) rules for pensions will operate when they come into effect for deaths from 6 April 2027.

While the changes have already been announced, HMRC’s latest update provides clearer guidelines on what executors, beneficiaries and pension providers will need to do when someone dies.

The update lists five points within the process where executors and pension providers will need to exchange information:

• Notification of death and initial pension information – The executor should request basic details, including the value of the deceased's pension benefits.
• Further information – If an IHT return is required, the executor can request additional details, including how the pension benefits will be split between beneficiaries.
• Withholding notice – The executor can ask the pension provider to temporarily withhold up to 50% of certain pension benefits while any Inheritance Tax liability is being calculated.
• Payment notice – The executor or beneficiary can instruct the pension provider to pay some or all of the IHT directly to HMRC from the pension benefits. This step must be completed within 6 months of death, to avoid HMRC issuing a financial penalty.
• Tax-free lump sum death benefits – The executor can request information to help determine whether the deceased exceeded their available lump sum and death benefit allowance.

It’s important to note that not every estate will go through each stage, some stages only apply in certain circumstances, and multiple stages can take place simultaneously.

Depending on the circumstances, personal representatives and beneficiaries may have responsibilities for IHT attributable to pension benefits with HMRC pursuing either party if too little tax is paid. The withholding notice is an important safeguard due to this shared liability.

Gathering the initial pension information

On the death of the individual, the executor will need to collect information about pension arrangements along with other assets such as property, savings and investments when calculating the value of an estate.

Pension scheme administrators will usually need to provide key information, including the pension fund value at the date of death and potential beneficiaries, within a specified timeframe. This will help executors assess whether an IHT return is required and calculate any liability.

New powers to withhold pension benefits

Where an executor believes IHT may be payable, the introduction of the withholding notice enables them to instruct a pension scheme administrator to temporarily prevent payment of more than 50% of certain pension death benefits while the IHT position is established.

Paying IHT directly from a pension

Within HMRC’s newest technical notes, they confirmed an important new Direct Payment Scheme, allowing executors or beneficiaries to instruct a pension scheme to pay IHT directly to HMRC from inherited pension benefits. This may simplify the process of settling an estate by removing the need to fund the tax liability from other assets or personal resources.

Certain pension benefits passing to exempt beneficiaries, including surviving spouse or civil partner, and qualifying charities may be exempt from IHT. Benefits which pass to these beneficiaries are not expected to be subject to the same withholding arrangements.

How can individuals prepare?

Although the changes won’t come into effect until April 2027, those with substantial pension wealth should consider reviewing their estate plans well in advance.

Areas worth considering include:

• The potential IHT exposure of your pension assets.
• Whether your pension death benefit nominations remain appropriate.
• Whether consolidation may be appropriate, taking account of existing benefits, guarantees, charges and other relevant factors.
• How pensions fit alongside other estate planning arrangements.
• The likely impact on beneficiaries and future generations.
• Whether your wider retirement plans remain aligned with your objectives.

The changes represent a significant shift in how pension wealth may be treated on death and highlight the importance of taking a holistic view of retirement, tax and succession planning.

We’re here to help

The interaction between pensions, IHT and succession planning is becoming increasingly complex.Reviewing your arrangements can help you understand how the changes may affect your pension, estate and beneficiaries, and whether your existing retirement and estate planning arrangements remain appropriate for your circumstances.

If you would like to discuss how the upcoming pension and Inheritance Tax changes may affect your circumstances, please contact our Wealth Management team.

Important Information

1. This article does not constitute financial advice
2. Pension rules, including tax and death benefit rules, may change.
3. The changes will apply to deaths occurring on or after 6 April 2027. Those with significant pension assets may therefore wish to review how the changes could affect their estate and beneficiaries.
4. You should seek regulated financial advice before making any decisions relating to pension or retirement income.
5. The Financial Conduct Authority does not regulate tax advice, estate planning or trust advice in all circumstances. Tax treatment depends on individual circumstances and may change in the future.