Inheritance Tax changes 2027 - your guide to IHT on pensions
A significant new rule change to pension death benefits and inheritance tax (IHT) is coming into play in 2027 - bringing most unused pension funds and pension death benefits into estates for IHT purposes.
Many estates that previously fell outside of the scope for IHT could face a tax liability, changing the role pensions play in estate planning.
While many headlines have focused on the tax implications, there are also important changes to the process of paying IHT and new responsibilities for pension providers, beneficiaries and personal representatives.
Here are some of the new processes.
Who's responsible for dealing with IHT?
Under the new rule, responsibility for pension death benefits will generally now sit with the Personal Representative.
In many cases this will be an executor named in the will. The Personal Representative will be responsible for reporting death benefits to HMRC and arranging payment of any IHT due on pension assets.
At Parmenion we’ll require them to provide evidence of their identity.
What if there's no will?
Where someone dies without a will there may not be a legally appointed Personal Representative. If someone reasonably expects they’ll be responsible for administering the estate, they can act as a Prospective Personal Representative.
Pension schemes will share information with them, but they’ll need to provide evidence to establish their status first.
Are there any new tools to manage IHT liabilities?
Two new tools have been introduced to help manage potential IHT liabilities - both could be key parts estate planning going forward: Withholding Notices and Payment Notices.
Withholding Notices
A Withholding Notice allows a Personal Representative or Prospective Personal Representative to ask a pension provider to temporarily retain part of a beneficiary’s entitlement. Up to 50% of an entitlement can be withheld for up to 15 months.
This provides protection in case there’s an IHT liability which is unforeseen, so the money can be used to pay HMRC.
A Withholding Notice can’t be given more than 15 months after the end of the month in which the person died, or if the IHT has already been paid.
Payment Notices
A Payment Notice allows IHT to be paid directly from pension death benefits. It can be issued before or after benefits have been paid to beneficiaries - and is an easier way of settling IHT liabilities.
It can be issued by:
A Personal Representative
An individual beneficiary for their own liability
A trustee acting for a trust that receives pension death benefits
If pensions are now subject to IHT, why do pension death benefit nominations still matter?
It’s a common question advisers might hear.
“If pension death benefits are now subject to IHT, does a nomination still matter?” The answer is yes.
Historically, pensions held in trusts were outside the scope of IHT because the benefits were left up to the trusts and its trustees’ discretion.
That trustee discretion still matters, as it helps make sure that benefits are paid to the most appropriate recipients based on the circumstances at death.
Life events like divorce, re-marriage and changes in financial dependency can influence trustees’ decisions. If death benefits were paid out as if it were a legal instruction, trustees could pay benefits to someone who was no longer appropriate.
For example:
Member nominates their spouse in 2018
Divorces in 2022
Remarries in 2025 but doesn't update the nomination
Has a child in 2026
If the member passes away and the nomination was legally binding, the ex-spouse might receive the entire pension. But because the trustees have discretion, they could choose that the current spouse and children benefit instead.
We're keeping an eye
With the rules not due to take effect until 2027, there may still be further clarification and operational detail to come. We'll continue to keep a close eye on developments and share updates as the picture becomes clearer.
If you have any questions or fancy a chat about any new rules, get in touch here.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.
