HMRC misses the mark on IHT changes

From April 2027, unused pension pots will be included in inheritance tax (IHT) calculations. While HMRC had proposed measures to calculate and pay the IHT arising on pension schemes, the changes still posed practical challenges for families.

What’s changing in April 2027?

Unused pensions – mainly uncrystallised pots or drawdown accounts – will be subject to IHT when someone dies. The personal representative will be responsible for calculating and paying the tax to HMRC by the end of the sixth month after the person died. Miss the deadline and late interest charges (currently 8%) will apply.

Why this matters for personal representatives

Under previous proposals, personal representatives were to be liable for IHT but would have no authority to direct payment from the pension scheme. This could cause conflict – for example, if pension beneficiaries are not aligned with estate heirs and claim all pension benefits, leaving personal representatives to cover the IHT from estate assets and later recover it from the pension beneficiaries.

New powers for personal representatives

Two key changes to the process aim to ease this burden.

• Direct payment option: personal representatives can ask the pension scheme to pay IHT due on the pension directly.

• Withholding option: personal representatives can ask schemes to hold back up to 50% of pension benefits for 15 months after death, giving personal representatives time to calculate the final IHT bill.

Practical issues to watch

These tweaks aren’t perfect. Holding back 50% of a pension pot could cause distress for beneficiaries who need funds quickly. Delays may also increase late payment interest charges, reducing what’s left for the beneficiary.

A missed opportunity

While these changes help, HMRC could have gone further by replacing these proposals with a stand-alone tax on pensions at death, which would have been simpler and less stressful for grieving families.

Your next steps

• Review clients’ pension arrangements and estate plans ahead of April 2027.
• Explain potential delays and disputes to clients and beneficiaries.
• Consider strategies to minimise IHT exposure on pensions.
• Monitor HMRC updates for any further guidance.
• Discuss the changes with professional connections, such as solicitors.