Inheritance tax on pensions from 2027: what solicitors and personal representatives need to know

From 6 April 2027, unused pension funds and most death benefits will be brought within the scope of Inheritance Tax (IHT). Although the principle is clear, the practical implications for solicitors and personal representatives (PRs) are less straightforward.

This is not simply an extension of the tax base. It represents a change in how estates must be administered, requiring greater coordination, earlier action and more careful allocation of liabilities than many practitioners will be used to.

New responsibilities for personal representatives and executors

Historically, many pension arrangements, particularly discretionary defined contribution schemes, have fallen outside the estate for IHT but that position will largely disappear. PRs will be required to identify pension arrangements, obtain date-of-death valuations and incorporate them into the estate when calculating IHT.

This aligns pensions with other forms of wealth, but it also introduces a more complex administrative process. Unlike other assets, pensions are not treated as a single figure. Each arrangement must be considered separately, often involving multiple providers and timelines.

Identifying and valuing pension assets across multiple schemes

For many individuals, retirement provision is spread across several pension arrangements accumulated over time. Each of these arrangements must now be dealt with independently.

PRs will need to obtain valuations from each scheme and identify the beneficiaries entitled to receive the benefits. In doing so, they are expected to take “reasonable steps” to identify all pension arrangements. However, what constitutes reasonable steps is not fully defined, particularly in a landscape of incomplete records and multiple historic providers. This will bring an additional element of uncertainty and potential risk at an early stage of administration.

The result is a more fragmented estate profile, with different stakeholders involved at each stage. The need to engage with several providers simultaneously will add pressure in what is already a time-sensitive process.

How IHT liability will be allocated between beneficiaries

While IHT is calculated across the estate as a whole, the liability does not fall evenly. The available nil-rate band must be apportioned across pension and non-pension assets, with each element bearing its share of the tax.

This process becomes more complex where there is a mix of exempt and non-exempt beneficiaries. Transfers to spouses and charities remain exempt, but other beneficiaries will be subject to IHT on the value they receive. The consequence is that different beneficiaries may face markedly different effective tax positions depending on the assets they inherit.

In addition, both PRs and pension beneficiaries may be exposed through joint and several liability for the IHT attributable to pension benefits. This creates a position where responsibility for errors or delays does not rest with a single party. For PRs, this requires careful calculation and clear communication, particularly where the allocation of liability may not align with beneficiary expectations.

Managing IHT payments

The framework allows some flexibility in how IHT is paid. In broad terms, the tax attributable to pensions may be settled from the estate, by the beneficiaries, or through direct payment from the pension scheme to HMRC.

In practice, direct payment via pension schemes is likely to be widely used. However, this relies on effective coordination between PRs, scheme administrators and beneficiaries. The PRs must first determine the tax attributable to each arrangement before payment can be made, which introduces additional steps into the process.

The reforms are supported by new information-sharing requirements between PRs and pension scheme administrators. These requirements formalise the exchange of valuations and beneficiary details. While helpful in principle, they add further administration to what is already a complex exercise.

Withholding pension benefits pending inheritance tax settlement

One of the more notable features of the reforms is the introduction of a withholding mechanism. PRs may require pension schemes to retain up to half of the taxable benefits for a period of up to 15 months following death.

This is intended to ensure that sufficient funds are available to settle the IHT liability. While administratively useful, it may delay access to funds for beneficiaries, particularly where they would otherwise expect prompt payment.

Meeting the six-month deadline

The extension of IHT to pensions does not alter the fundamental timetable for payment. Tax remains due by the end of the sixth month following the month of death. This applies regardless of whether valuations have been finalised or all pension arrangements have been fully clarified.

Valuations themselves may initially be provisional. PRs may be required to amend returns if further information becomes available or additional pension funds come to light. As a result, PRs may have to act based on incomplete information, which reinforces the need for early engagement and careful judgement.

HMRC interest on late payments

If IHT is not paid within the six-month period, interest accrues automatically. HMRC currently applies a rate equivalent to base rate plus 4%, which would total 7.75% per annum as at the time of writing.

For estates with significant pension assets, even relatively short delays can result in additional costs. In practice, this makes payments on account an important tool for PRs, allowing them to manage exposure to interest where final figures are not yet confirmed.

Interaction with BPR and APR

The inclusion of pensions within the IHT regime also raises questions about how existing reliefs apply. Assets that might attract Business Property Relief (BPR) or Agricultural Property Relief (APR) if held directly may not benefit from the same treatment within a pension wrapper.

The combined effect is that pensions are being brought into the IHT system without always benefiting from the full range of protections available to other assets. In addition, where death occurs at or after age 75, pension funds may be subject to both IHT and income tax when distributed. This can increase the effective tax burden in some cases.

Practical considerations for solicitors and private client teams

For solicitors, these changes require a more proactive approach to estate administration. Pension arrangements should be identified at an early stage, and communication with scheme administrators should begin without delay.

The practical challenges created by multiple arrangements may also prompt greater consideration of consolidation during a client’s lifetime. While long viewed primarily as an administrative convenience, consolidation may in future play a more significant role in simplifying estate administration, reducing fragmentation and easing the burden on PRs in identifying and coordinating pension assets.

It is also important to manage expectations around timing and tax outcomes. Beneficiaries may be affected in different ways, depending on both the assets they receive and how liabilities are allocated. In many cases, PRs will need to make difficult decisions on incomplete information, with limited scope for delay.

Preparing for the 2027 pension inheritance tax regime

The extension of IHT to pensions is often described as a tax measure. In reality, it is equally a procedural one. Pensions will become a central part of estate administration, frequently representing one of the most significant and complex elements of the estate.

For practitioners, the challenge lies not only in understanding the rules but in applying them effectively within tight deadlines and with limited room for error.