Reforms to inheritance tax and pensions: key actions for pension scheme trustees

From 6 April 2027, important reforms to the inheritance tax (IHT) regime will mean that, subject to some specific exclusions, most authorised death benefit payments from registered pension schemes will be brought within a deceased's estate for IHT purposes.

Personal representatives and beneficiaries will be able to ask pension scheme trustees (Trustees) to withhold and pay IHT due and administrative systems will need to adapt to comply with the new legislation (including additional information sharing requirements).

We take a look below at the reforms and the key actions Trustees of both defined benefit and defined contribution schemes should be taking now to ensure that they are compliant by April next year.

Summary of the IHT reforms

Recap on existing IHT treatment of pension death benefits

Currently various lump sum death benefits and unused defined contribution pension funds which are paid as lump sum death benefits through discretionary trust provisions do not form part of the deceased member's estate and are not subject to IHT.

Existing IHT principles also provide an exemption to IHT when death benefits pass to a surviving spouse or civil partner or to a registered charity.

Summary of IHT changes from 6 April 2027

From 6 April 2027, subject to some specific exclusions (please see below), most authorised death benefit payments will be brought within a deceased's estate for IHT purposes (regardless of whether or not the benefit is paid through discretionary trusts).

Legislation is now in place confirming which death benefits will fall within the IHT net and setting out the statutory framework for the payment and withholding of IHT due.

The following death benefits will be excluded from IHT from 6 April 2027:

• Death in service benefits (e.g. 4x salary multiple)
• Dependant's scheme pensions
• Annuities for dependants (bought at the same time as a lifetime annuity for the member)
• Trivial commutation lump-sum death benefits.

(collectively Excluded Benefits).

Existing IHT principles providing an exemption to IHT when death benefits pass to a surviving spouse or civil partner or to a registered charity will be retained and death benefits will also be able to pass to political parties, housing associations, gifts for national purposes and maintenance funds for historic buildings without attracting IHT (collectively Exempt Benefits).

Any other lump sum death benefits payable from a registered pension scheme (which are not Excluded Benefits or Exempt Benefits) will from 6 April 2027 form part of a deceased member's estate for IHT purposes.

Importantly the reforms only apply to registered pension schemes, so any death benefits payable through an excepted group life trust will automatically fall outside the scope of these changes.

Key actions for trustees: It will be important to conduct a legal audit of the various death benefits payable under the trust deed and rules to identify which benefits will fall within the IHT net (and hence could be subject to payment and withholding notices – please see below).

Payment of IHT and withholding notices from 6 April 2027

The personal representatives of the estate will be primarily liable for reporting and paying the IHT due on any unused pension funds or relevant death benefits to HMRC. Beneficiaries of the death benefits will become jointly and severally liable for any IHT due from the point they are confirmed by the Trustees as beneficiaries.

Personal representatives and beneficiaries will, however, be able to direct the pension scheme administrator to pay IHT on their behalf direct to HMRC (subject to specific payment conditions being satisfied, including a de minimis £1k IHT charge), with Trustees then having the ability to adjust relevant scheme benefits accordingly.

Where personal representatives / beneficiaries exercise the option to direct payment of the IHT from the pension scheme, the payment of the IHT must be made to HMRC within 35 days from receipt of a valid payment notice.

Personal representatives or prospective personal representatives who know or believe that IHT may be payable can also provide a withholding notice to the pension scheme administrator instructing them to hold back 50% of the taxable benefits (i.e. those death benefits potentially subject to IHT) for up to 15 months after the end of the month in which the member died. The withholding period can expire earlier if the IHT is paid or if the notice is withdrawn.

During the withholding period the pension scheme administrator must not pay any beneficiary (other than those who fall within the Exempt Benefit category) more than 50% of their benefit entitlement. Once the IHT is paid or the withholding notice expires, the remaining benefits can be released to the relevant beneficiaries.

Key actions for trustees: Pension scheme rules will need to be amended to permit the payment of IHT (and consequential adjustment of benefits) when a valid payment notice is received and in order to comply with withholding notices.

Administrative processes and information sharing from 6 April 2027

Trustees will need to work with their third party administrators and legal advisers to ensure that new administrative processes are put in place to comply with the legislative requirements on payment notices and withholding notices.

HMRC have issued technical guidance on such notices which can be found here. The new processes will need to include:

• In respect of payment notices, verification of valid requests, checklists to ensure that the various statutory payment conditions are satisfied and that payment of IHT is made within the prescribed timeframes from receipt of a valid request
• In respect of withholding notices, verification of personal representatives and prospective personal representatives, verification of valid notices, establishing which scheme benefits are subject to the withholding notice and which are not and acknowledging notices and providing prescribed information within the statutory timeframes.

Regulations have now also been laid before Parliament, which contain detailed provisions on what information must be shared (and when) between pension scheme administrators and personal representatives of a deceased's estate. The pension scheme administrators will need to develop processes to comply with the legislative requirements and accompanying guidance from HMRC.

Key actions for trustees: Trustees will need to ensure that administrative processes are updated to comply with the legislative requirements and HMRC guidance. Member booklets and communications will also need to be updated to provide sufficient information on the IHT reforms (including the availability of payment and withholding notices).

Checklist of recommended actions

If you require assistance in complying with these changes or if you wish to discuss your scheme more generally please get in touch with your regular pension team contact.