New rules on inheritance tax on pensions will give executors and other personal representatives added responsibilities from 6 April 2027.
Most pension death benefits will become potentially liable for inheritance tax under the UK-wide changes. This means the people dealing with an estate may need to report and pay tax linked to pension benefits.
It also gives people another reason to think carefully about who they appoint as executor when making or reviewing a will.
How the new pension rules have developed
The Chancellor first announced the change in the October 2024 Budget. However, the main legislation did not become law until March 2026.
HMRC still needs to introduce the regulations that will make the new system work. It must also consult on and publish detailed guidance and supporting information.
The final details are not expected until spring 2027. That leaves relatively little time before the rules begin in April.
Why the process is taking time
The new system needs to work for everyone involved in dealing with pension benefits after someone dies. This includes:
- the executors or other personal representatives
- pension scheme administrators and trustees
- beneficiaries receiving pension benefits as income or a lump sum
- HMRC, which may collect both inheritance tax and income tax
HMRC published a technical note at the end of May setting out how it expects the process to work.
Responsibility for reporting and paying IHT
Executors and other personal representatives will have the main responsibility for reporting and paying any inheritance tax due on pension benefits.
However, once the pension scheme confirms that someone is entitled to a lump sum or pension, that beneficiary will also become jointly and severally liable.
In practice, this means the beneficiary may have to pay the tax if the estate does not.
Pension schemes may hold back part of a benefit
Dealing with an estate can take time. Executors need to identify the assets, establish their value at the date of death and work out whether inheritance tax is due.
To allow for this, they will be able to ask a pension scheme to hold back up to 50% of a beneficiary’s entitlement. The scheme may keep this amount as a reserve against a possible tax bill for up to 15 months.
This will not apply to exempt beneficiaries, mainly surviving spouses and civil partners.
It will also not apply to certain excluded benefits, including:
- dependants’ scheme pensions
- joint-life annuities
- death-in-service payments
Choosing your executors carefully
The new duties linked to inheritance tax on pensions could make estate administration more involved.
It may therefore be worth reviewing who you have appointed as executor and whether they are comfortable taking on the role.
If you do not yet have a will, the pension changes provide another reason to consider putting one in place.
HMRC’s technical note on inheritance tax and pensions is available here.