- Budget documents confirm small change to administrative process attached to bringing pensions into inheritance tax (IHT) from April 2027 (Source: HMT | Budget 2025 | GOV.UK)
- Personal representatives (PRs) can now intervene to ask the pension scheme to retain half the pension fund for up to 15 months and pay the IHT due in certain circumstances
- The move should ease the pain for PRs who were told in July they would be required to handle the reporting and payment of IHT as they already manage the rest of the estate
- These plans will still create complexity, confusion and additional costs for bereaved families
- AJ Bell was among many names in the industry opposed to the original plans, which were unworkable and risked creating unnecessary delays and significant costs to beneficiaries
Rachel Vahey, head of public policy at AJ Bell, comments:
“Yesterday’s Budget was full to the brim with a raft of changes that will affect the nation’s personal finances, and advisers will still be picking the bones of the Budget documents for any of the less prominent and headline-grabbing policies announced.
“One that may catch the eye off the back of last Budget’s hugely controversial plans to bring pensions into IHT from April 2027 is that personal representatives can now intervene to ask pension schemes to retain half the pension fund (and not pay it out to the beneficiary) for up to 15 months and pay the IHT due in certain circumstances.
“This tweak to the process will give personal representatives a little bit of flexibility. Some would have been worried that only allowing the pension beneficiary to direct the payment of inheritance tax due on the pension would lead some personal representatives on a merry dance trying to reclaim the money if the pension beneficiary withdrew all the funds.
“But although this will give the personal representatives the power to hold back 50% of the pension benefit to pay HMRC the IHT due, it doesn’t get away from the hard cold truth that bringing pensions into the net of IHT is going to lead to some administrative nightmares for those responsible for winding up the affairs of loved ones.
“A better solution would have been to find a completely different way of taxing pension benefits on death – something most of the pension industry have spent the last year urging HMRC to do. It’s disappointing that HMRC has stubbornly chosen again to stick with the hard administrative path, rather than thinking about the grieving families who will sadly get caught up in this administrative torment at the time they are most vulnerable.”
Background:
Autumn Budget papers have confirmed a small change to how inheritance tax (IHT) due on pensions could be paid.
Unused pensions are due to be included in calculations for IHT from April 2027. Personal representatives will be liable for IHT due on pensions, and responsible for calculating and paying it.
Earlier proposals allowed only the pension beneficiary to instruct the scheme to pay IHT directly from pension funds, raising concerns that personal representatives might struggle to ensure the IHT bill is settled. For instance, if a beneficiary withdrew all funds from the pension, personal representatives may have been forced to pay all the IHT from the estate to stop late payment interest from building up and could have had difficulty reclaiming the IHT owed.
A change in the process will mean personal representatives can intervene to ask the pension scheme to retain half the pension fund – not paying it out to the pension beneficiary for up to 15 months – and pay the IHT due in certain circumstances. This should make it easier for personal representatives to ensure the IHT bill is settled in full, without having to rely on estate funds to pay the IHT due from the pension.
The Budget papers also clarified that personal representatives will not be liable for IHT due on any pension schemes which are only discovered after the IHT bill has been settled.
The Finance Bill – due to be published on Tuesday – will include details of who is liable for any IHT due on pensions, and how it should be calculated and paid.
