Inheritance Tax & Pensions: Changes from April 2027

What Personal Representatives Need to Know from April 2027

Significant changes to the inheritance tax (IHT) treatment of pensions are due to take effect from 6 April 2027. For personal representatives, these reforms will introduce new responsibilities and could make estate administration more complex.

Changes from April 2027

Currently, the value of most unused pension funds and death benefits sit outside an individual’s estate for IHT purposes. From April 2027, the value of most unused pension funds and pension death benefits will be included within the value of a deceased person’s estate when calculating IHT. Some estates previously below the IHT threshold may become liable for tax, whilst others may face a larger IHT bill.

For personal representatives, the impact goes beyond a potentially higher tax liability. They’ll play a central role in identifying pension assets, obtaining valuations, reporting them to HMRC and ensuring IHT is paid. Pension assets remain under the control of pension providers or scheme administrators. Personal representatives however will be responsible for coordinating the information needed to calculate the resultant tax position.

Early Action is Essential

Personal representatives should contact pension providers as soon as is practically possible after a death to establish the value of any pension benefits. Delays in obtaining valuations and information could slow the administration process, delay confirmation of the estate’s IHT position and obtaining a Grant of Probate. Pension providers and personal representatives will need to share information and work collaboratively to ensure the correct treatment is applied before benefits can be fully distributed.

What is a Withholding Tax Mechanism?

One of the most notable practical changes is the introduction of a withholding tax mechanism. Where IHT is expected to be due, personal representatives may be able to direct pension scheme administrators to withhold up to 50% of the taxable pension death benefits for a period of up to 15 months whilst the IHT position is determined and settled. As a result, beneficiaries may not receive the full value of their pension entitlement immediately.

Personal representatives will need to ensure that all relevant pension values are included within the IHT return and work with pension providers or scheme administrators to facilitate payment of any tax due. Pension arrangements including illiquid assets, such as property/business investments, which may not be easily converted into cash may be challenging.

We’re Here to Help

Although further guidance is still being developed, the direction of travel is clear. Pensions will become a more significant part of the IHT conversation. Personal representatives will need to be prepared for additional administrative responsibilities.

Reviewing pension arrangements and keeping records up to date could help reduce delays and complications for personal representatives when the new rules come into force.

We assist with lifetime gift and inheritance tax planning and tax efficient asset re-structuring, tailored to your circumstances. We are also able to assist in non-contentious Grant of Probate, estate administration and trust work. For assistance in tax compliance/planning advisory services in these specialist areas, reach out to your local Whitings office today.

To find out more about the tax effects, click here to read our post ‘Up to 67% Tax on Pensions’.