Paying IHT on Pension Property: The New Process for Personal Representatives (PRs)

New Technical Note

One of the key changes that the government announced in their October 2024 budget was that as from 6th April 2027 unused pension value (Pension Property) will be subject to inheritance tax (IHT) on the death.  This is a significant change, mainly for families who will suffer the burden of a larger IHT bill but also for the pensions industry and private client advisors who have been keen to understand exactly how this additional IHT will be paid and where obligations and duties will sit between them. 

There has been steady progress in the provision of details (see links to our previous articles below) and the government’s most recent Technical Note was published on 11^th May 2026. As well as further technical points and clarifications (more detail to follow), this sets out a timetable for further detail and guidance and a greater degree of insight as to how the taxation process will work in practice.

There are numerous scenarios which would highlight potential complexities and issues which will doubtless arise in practice but let’s consider this from a PR perspective by mapping though a more typical scenario:

Mr Smith is a widower with two adult children, Peter and Jane.  He owns his house (£1.2m), investments (£500k) and cash (£200k) so a total estate of £1.9m and a SIPP.  Mr Smith dies aged 75 leaving his estate by Will to his children but as they do not get along, he has appointed his friend, Mr Jones to be his PR. From a review of Mr Smith’s paperwork, it is discovered that the SIPP is administered by ABC and by reference to the latest statement is valued at around £800k.  It seems that Mr Smith had not withdrawn any benefits and at this stage there is no information regarding his nominated pension beneficiaries though he had always told Mr Jones that it was intended to be a tax-free pot for his children.

Death before 5^th April 2026

Under the current IHT regime, IHT is payable on his estate assets alone.  The estate benefits from Mr Smith’s nil rate band, his late wife’s full unused nil rate band and as the value of his estate is under £2m, also benefits from both Mr & Mrs Smiths’ residence nil rate bands, a total of £1m.  The IHT works out at £360k (£1.9m - £1m = £900k x 40%) which can easily be settled from the cash and those investments which are available pre-Grant of Probate[1].

ABC are advised of Mr Smith’s death.  The confirm that they hold Mr Smith’s nomination in favour of his children and the pension trustees exercise their discretion in accordance with that and arrange for the benefit of the £800k to pass to Peter and Jane equally in whatever way the scheme allows and they elect.  Mr Jones has little involvement beyond the initial notification, the provision to ABC of basic family information and including minimal details in the IHT return.

Death post 6^th April 2026

Fast forward to the new era and the IHT liability rises significantly to £820k (an increase of £460k). This is because not only is the SIPP value of £800k included in the taxable total but its addition pushes Mr Smith’s estate over the threshold[2] for the residence nil rate bands which are therefore lost.

Very broadly the government has assumed that beneficial entitlements will be common across pensions and estates and whilst often true, this will certainly not always be the case. Their working assumption seems to be that PRs can readily pay all the IHT due from estate funds to which they have access and balance this against beneficiaries’ pension entitlements. 

However, Mr Jones cannot easily settle this liability from the cash and investments, and Jane does not want to him to incur any interest on late IHT, which utilising the instalment option will likely give rise to.  He must therefore engage with the process for accessing the Pension Property to settle all the IHT within 6 months of Mr Smith’s death[3].  

The following represents the likely process based on the available information to date.  More detailed information and guidance is promised from “Spring 2026” and it is envisaged that pension scheme administrators will formulate their own administration process and forms based on this. The following represents the likely process based on information to date.

The new information process:

1. Mr Jones informs ABC of the death of Mr Smith and explains that his estate is taxable to IHT and makes a formal request for a valuation of the Pension Property and details of the pension beneficiaries. This is an important step and sets the timetable for the following exchange of information, even if ABC already know from another source that Mr Smith has died. 

2. ABC wish to see evidence that Mr Jones is the PR.  He has not yet obtained the Grant of Probate so supplies them with a copy of the Will to confirm his status as a prospective PR and they are content regarding his status[4].

3. Within 28 days of the request at 1 above ABC must give Mr Jones a valuation of the Pension Property.

4. Within either 28 days of the request at 1 above or within 14 days of determining the pension beneficiaries, ABC must also tell Mr Jones whether the pension beneficiaries are exempt or non-exempt from IHT.

5. Assuming not provided at 4 above, Mr Jones must now make a second formal request for full details of the pension beneficiaries.

6. Within either 28 days of the request at 5 above or within 14 days of determining the pension beneficiaries, ABC must provide Mr Jones with the full names, addresses and national insurance numbers (if known) of the pension beneficiaries and further the value of the Pension Property allocated to each to them.  Here, as suspected, the pension beneficiaries are Peter and Jane who are sharing the Pension Property equally.

   The new withholding notice process:

7. With all the information now available, Mr Jones is able to calculate that the Pension Property’s share of the IHT is £242,962 with £121,481 allocated to each of Peter’s and Jane’s respective half share “pots”.

8. Mr Jones knows he needs to settle some of the IHT from the Pension Property so before ABC pay any pension benefits to Peter and Jane he wants them to withhold an amount to cover this IHT.  He is able to ask ABC to withhold up to 50% of each of Peter’s and Jane’s respective pots by issuing a withholding notice at any time within 15 months of Mr Smith death[5].  Clearly the sooner he sends a withholding notice the less chance there is of ABC paying out the pots to Peter and Jane at which point Mr Jones loses this degree of control over the Pension Property and would have to reply on the full co-operation of Peter and Jane.

   The government’s suggestion is that withholding is not intended to be used routinely or on a precautionary basis and can only be used where the PR knows or has reason to believe that IHT will be due.  Mr Jones thinks that the valuation of the house was a conservative one and that that on review, HMRC may seek to increase it therefore increasing the IHT liability across the board.  He therefore decides to ask ABC to withhold 50% even though the current numbers suggest a withholding of some 31% would be sufficient. 

   There will in due course be an HMRC template for the withholding notice for adoption by pension scheme administrators which will require the obvious details and also declaration that the PR believes that IHT is due form the Pension Property, that he understands the effect of withholding and that the information provided is true to the best of their knowledge and belief.

9. ABC must acknowledge receipt of the withholding notice and confirm its validity within 14 days of receipt.

   ABC must also notify Peter and Jane that a withholding notice has been lodged within 14 days of receipt.  This will include details of Mr Jones as the PR. 

10. Unless withdrawn, a withholding notice will last to the 15^th month deadline after which ABC would be able to pay out the pots in full and are likely to want to proceed to do this quickly.

11. If ABC pays a benefit in breach of the withholding notice then they become jointly and severally liable for the IHT on the Pension Property, a situation which they will wish to avoid.

    The new payment process:

12. Having ring-fenced 50% of the Pension Property, Mr Jones wishes to direct ABC to make a payment of IHT to HMRC through the new pensions direct payment scheme which ABC have flagged[6].  This is actioned via a payment notice.  These can always be authorised by pension beneficiaries.  It is currently unclear if Mr Jones can submit a valid payment notice unilaterally as a prospective PR[7] and if not (which seems to be the suggestion) he will require the co-operation of Peter and Jane.  Jane is willing to participate in this process, acknowledging that her pot will suffer some IHT anyway.  Peter is more difficult and is impatient to receive as much as he can as soon as he can. Indeed, at his request, ABC have already paid out the 50% of his pot not withheld but cannot pay more without becoming jointly liable for the IHT.  Mr Jones is pleased that he issued the withholding notice promptly.

13. Mr Jones has calculated that he could potentially pay out the IHT referrable to Peter’s share from the estate assets and deduct them from his share of the estate and withdraw the withholding notice in respect of Peter’s pot but he is unhappy that this will give Peter more funds than Jane has had at this stage.  He manages to persuade Peter that given he will not be able to access the withheld balance until the 15-month deadline has passed in any event, that those funds may as well be used to settle the IHT due on them.  Further, he explains that any value used to pay IHT on his pot does not count towards his taxable pension income and that paying the IHT from his pot now will simplify the income tax payable on funds he receives, thereby saving future complications in reconciling his income tax position with HMRC.

14. The administration of the estate progresses and Mr Jones obtains his Grant of Probate.  HMRC do indeed increase the value submitted for the house and issue a calculation for further IHT.  As this occurs within the 15-month withholding deadline and, significantly, post Grant, Mr Jones alone is able to give a further payment notice to ABC directing further payment from the pension pots for their respective shares of the increased IHT. Peter and Jane do not need to consent.

    Amendments:

15. At the end of a gruelling administration Mr Jones applies for and receives IHT clearance[8]. A month later he receives a letter out of the blue from a company called Old Style Ltd who Mr Smith worked for many years ago.  It seems that there was a workplace pension which hasn’t been touched. It is worth £10,000 so further IHT of £4,000 is due. 

16. Mr Jones is obliged to file a corrective IHT account to notify HMCR of the additional asset.  He has calculated that of the £4,000 IHT due, £3,040 is payable by the pension beneficiary of the Old Style Ltd pension, £675 by the estate and £285 from the ABC Pension Property as a whole.  Jane is willing to meet her share from the funds she has received from the estate and ABC but Peter is not.

17. As Mr Jones has received formal IHT clearance, he is relieved to note that he is not liable for any of the IHT payable in respect of the Old Stye Ltd Pension Property, the pension beneficiary of that is solely liable.  HMRC does, however, look to Mr Jones for full settlement of the rest.  Jane contributes her share but Peter refuses as he thinks Mr Jones should have worked harder to find this pension at the outset. Begrudgingly, Mr Jones decides to settle the balance personally.  He contemplates taking action against Peter for recovery but for the amount involved decides he would prefer to sever all connections with him and enjoy his own imminent retirement, during which he plans to spend the entirely of his own Pension Property!

Practical tips:

• Testators should help their PRs by actively identifying and documenting all pensions that they have. There is no easy and exhaustive way to search for these even with the imminent advent of the Pension Dashboard. Pension entitlements cropping up much later will cause a big headache for PRs. 

• Following death, PRs should undertake a thorough search for all possible pensions, including searches of the deceased’s papers/records, noting past employers, official tracing sites, government agencies.  It may be that more exhaustive pension tracing services will emerge in the market place in the future.

• PRs should pay close attention to the new timeframes and deal with any possible entitlements promptly including issuing any withholding notices once it is established that the estate is taxable.

• PRs should be prepared to work more closely with the pension scheme administrators who will also be new to this process and each administrator may have different administrative requirements.  Collating all family and background information at an early stage is likely to facilitate the pension process.

• Early communications with pension beneficiaries will be key, especially in scenarios when they are not beneficially entitled under the estate and there is limited opportunity to offset IHT referable to their Pension Property.  Doubtless information regarding their IHT obligations will flow from pension scheme administrators but a prompt introduction and explanation from the PR may held manage expectations and facilitate co-operation. 

• Obtaining an IHT clearance certificate will become even more important for a PR, even if they take a long to time to be issued by HMRC.  It may save them a future liability to IHT on undiscovered Pension Property.

Previous Articles

New IHT Legislation: A further focus on the position of PRs

Who will bear the burden of implementing IHT changes