Personal representatives will be able to direct pension administrators to withhold 50% of taxable death benefits in order to pay inheritance tax (IHT).
Contained in the official Budget document, but not covered in the chancellor’s speech, this 50% will apply in “certain circumstances”, as will a window of up to 15 months.
The change will see personal representatives discharged from a liability for payment of IHT on pensions discovered after they have received clearance from HM Revenue & Customs (HMRC). This will be legislated for through the 2025-26 Finance Bill and take effect from 6 April 2027.
Reactions have been split, with commentators applauding the flexibility this should afford personal representatives while raising concerns about the increasing integration between IHT and pensions.
Andy King, retirement specialist at Evelyn Partners, said it was a “welcome change” that should support bereaved parties. Currently, pensions subject to IHT need to be settled and paid within six months, which can lead to complications if illiquid assets need to be sold.
“Providers and lawyers had voiced concerns that executors could be liable for IHT if it wasn’t paid by the beneficiary, such as in a case where they lived overseas and refused to pay,” said King.
“The legal profession was concerned that, as personal representatives, they might be liable for taxes due if 100% of the pension’s funds were distributed.
“This new rule allows for 50% of the assets to be withheld, allowing for an orderly disposal over 15 months and payment of the tax. Personal representatives will also be discharged from liability for pensions discovered after they have received clearance from HMRC.”
Disappointment as HMRC presses on with IHT plan
Rachel Vahey, head of public policy at AJ Bell, said the “tweak” would give personal representatives greater flexibility in such situations but warned about the wider repercussions.
“It’s disappointing that HMRC has chosen to stick with the hard administrative path, rather than thinking about the grieving families who will sadly get caught up in this administration nightmare at the time they are most vulnerable.”
Rachel Vahey, AJ Bell
“It doesn’t get away from the cold, hard 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,” said Vahey.
“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 chosen again to stick with the hard administrative path, rather than thinking about the grieving families who will sadly get caught up in this administration nightmare at the time they are most vulnerable.”
Andrew Tully, technical director at Nucleus, added that the change added further complexity to “an already difficult process”, risking delays in paying pensions to bereaved relatives.
Nucleus’ recent Retirement Confidence Index highlighted that almost half of people are worried about including pensions within IHT, with around one in seven younger and middle-aged people saying they would save less into their pension as a result.
Tully pointed to IHT alternatives for the government, such as the use of income tax or a one-off “death tax”. “Either of these alternatives would be much easier to communicate to people,” Tully added. “Personal representatives wouldn’t have to get involved in pensions, it would be simpler for schemes, and HMRC would receive generally accurate tax receipts quickly.”
