A technical note published today by HMRC has provided some clarifications on how Inheritance Tax on pensions will operate on deaths from 6th April 2027.
But HMRC plans to provide further information at intervals between now and next April, with final guidance only expected in Spring 2027 – just weeks before the new system comes in.
This could leave schemes struggling to update member communications and information ahead of the go-live date.
From April 2027, unspent DC pension pots and certain other pensions will be within scope of Inheritance Tax.
The key points of the new system, on which some further details have been provided today, include:
- A personal representative (PR) will need to track down all of a deceased person’s pensions and contact each pension scheme or provider. The scheme will need to provide information on the value of pension rights and who is due to receive the money. Transfers to spouses and civil partners who are long-term UK residents will remain exempt from IHT.
- The PR will combine this information with information about the rest of the estate and use a new online HMRC tool to work out what IHT is due (if any). If IHT is due, the PR will need to notify each pension scheme of their share of the IHT bill.
- To make sure that there is money available to pay the IHT bill, the PR will be able to instruct pension schemes to withhold up to 50% of the pension until the IHT has been settled, or until the month-end after 15 months has passed, if sooner. Today’s bulletin says that this power will often be used quite early in the process, but should only be used where the PR has ‘good reason’ to think that IHT will eventually be due.
- The PR – and any beneficiary of the pension – will be able to instruct the pension scheme or provider to pay IHT directly to HMRC on their behalf.
However, despite today’s further details, HMRC envisage that more information will only emerge in stages over the coming months, with final guidance only issued a matter of weeks before the go-live in April 2027.
The further details in today’s bulletin include:
- Death in service benefits are excluded. Nevertheless, there will be a requirement to report these benefits, which could cause issues for life-assurance-only schemes that currently do little or no reporting.
- There will be an onus on employers/schemes to ascertain if those on long-term sickness and other absences qualify.
- New clarifications have been provided on more complex death in service benefits – for example where the benefit has two or more components.
- If there’s no will, someone who expects to be the PR may, with evidence, issue a withholding notice. The guidance covers the evidence they should provide.
- The PR can only issue a notice if they believe Inheritance Tax may be due on the estate including the pensions, “based on the knowledge of the deceased’s estate and circumstances”.
Tim Camfield, principal at pension consultants LCP, commented: “There is helpful clarity here for bereaved families that half of the pension should generally be able to be paid out quickly. Pensions have often been a vital source of income for families following a death as they are outside the estate so can be accessed quickly. The estate – and from April 2027 the other half of the pension too – can often be in limbo for far too long for beneficiaries.
“But we have concerns about the impact of further guidance being issued in spring 2027, just weeks before actual cases begin to arise. HMRC’s consultative approach is welcome, but time is running out for HMRC to give schemes the detailed information which they will need to implement a new system which starts in less than a year’s time."
