Pensions and inheritance tax—preparing for 2027

While the primary legislation is now in place and we have draft regulations covering information sharing requirements, we are still awaiting further details, which will hopefully be included in guidance expected in spring and autumn 2026. A recent HMRC technical note gave some insight into what that guidance will contain. Despite the outstanding detail, there is much that schemes can be doing now to prepare for these changes.

How will IHT be calculated?

The new rules apply to registered pension schemes, qualifying non-UK pension schemes (QNUPS), and section 615 schemes. They work by treating the in-scope benefits as an asset in the deceased member’s estate, called “Notional Pension Property” (NPP).

IHT is then charged on the value of that NPP as part of the member’s overall estate, with the nil rate band applying across the whole estate (there is no separate pensions nil rate band). Each defined contribution (DC) and defined benefit (DB) arrangement is considered separately when calculating NPP.

The value of any property that can only be used to provide “excluded benefits” (see below) is deducted. Benefits paid to spouses, civil partners, and charities are exempt.

The flowchart below gives a high-level summary of the analysis. This should be considered for each arrangement within a scheme separately. It should be noted that there are nuances and complexities where specific advice should be sought.

Who is liable for calculating and paying IHT?

The deceased member’s personal representatives (PRs) will be responsible for calculating and paying IHT on NPP. Interest will accrue on unpaid IHT after six months, and penalties may be imposed from 12 months after death.

A Pension Scheme Administrator (PSA) can become directly liable to HMRC for IHT where it pays benefits in breach of a withholding notice or where it has failed to comply with a request to pay IHT under the Pensions Direct Payment Scheme (see below). 

Schemes should also be alert to the risk of complaints from PRs or recipients where slow processing of death benefits causes PRs to miss the six- or 12-month deadlines, leading to interest charges and penalties.

What will the process look like?

The draft regulations and HMRC’s technical note outline how the process is expected to work. Broadly:

1. Following the death of a member, the PR/prospective PR will need to request the value of the NPP and the split between exempt and non-exempt beneficiaries. This information is needed for them to determine whether IHT is payable and an IHT account needs to be filed.
2. The PSA must provide the requested information within 28 days of receiving the request, unless the beneficiaries haven’t been decided, in which case they must inform PRs of the exempt/non-exempt split within 14 days of that decision.
3. If the PR determines that an IHT account is required, they will need to request details of the pension beneficiaries and how much NPP is payable to each of them, to enable calculation of how much IHT is payable by each person.
4. The PSA must provide that information within 28 days from receipt of the request or, where later, 14 days from the beneficiaries being determined.

HMRC’s technical note discusses how schemes will need to verify the identity of a PR/prospective PR before sharing information. How that interacts with the above timeline is not clear—hopefully this will be clarified.

Asking schemes to withhold benefits

To help PRs manage their liability, the legislation introduces a new framework allowing PRs to give a withholding notice to a PSA while the IHT position is being established. While a withholding notice is in place, the scheme cannot pay any individual more than 50% of their benefits under the scheme.

The cap is applied on a per person basis and does not apply to any excluded or exempt benefits. A notice lasts for up to a maximum of 15 months after the member died. The draft regulations include requirements for schemes to provide information and notify affected individuals where a withholding notice is received.

There are a number of practical points for schemes to think about. A withholding notice will take effect from the moment it is received, so administration systems will need to be updated quickly to prevent payments being made in breach. Once a notice ceases to have effect, the withheld payment falls due immediately, so schemes will also need to be in a position to release benefits at short notice. For DC arrangements, schemes will need to consider how the withheld funds are held and invested in the meantime.

The “pensions direct payment scheme”

The legislation introduces a new mechanism to help meet IHT liabilities out of pension benefits where the amount of tax is at least GBP1,000. Under this process, the taxpayer gives notice to the PSA requiring it to pay the IHT attributable to their NPP under the scheme.

Once a valid notice is received, the PSA must pay the tax to HMRC within 35 days. Schemes will need to put in place processes to handle these requests. The draft regulations include requirements for PSAs to provide information to PRs, beneficiaries and HMRC where tax is paid directly.

What should schemes be doing?

There is a lot to do between now and April 2027. Here’s a road map of key actions to get you on your way:

Now:

• Consider a sub-committee—there’s a lot to get on top of, would it be worth having a group focused on it?
• Work with your administrators—a lot of the actions will fall on their shoulders so you want to know that they are fully prepared. Check what your administration contract says.
• Review your scheme benefits—do you want to keep discretionary trusts for payment of lump sum death benefits when they no longer protect benefits from IHT? Or does the flexibility still offer advantages? Are options in your rules inadvertently causing benefits to fall into the IHT net?
• Examine your decision-making—can you speed things up to help meet the 6 and 12-month deadlines?
• Training—make sure you’re all up to speed on the changes.

Spring/summer 2026:

• Update the action plan as we receive more guidance from HMRC.
• Get your actuary on board—actuarial assumptions will be needed for some calculations.

Autumn/winter 2026/2027

• Member communications—you’ll need to think about how you communicate to members; existing communications, e.g., member booklets, websites, death benefit forms will need to be updated.
• Front-line preparations—are administrators ready for the new processes? Are call handlers ready for questions? Are you ready to handle any complaints?
• Scam prevention—scammers could use the changes to try to convince members to move their benefits by promising an escape from IHT; think about how you warn members and check your transfer scam checks.
• Data protection review—there may be issues such as updating your privacy notice.

April 6, 2027, onwards

• All new systems and processes should be up and running.
• You’ll need to be ready to comply with new HMRC reporting requirements.