New IHT Legislation & Pensions: A further focus on the position of Personal Representatives

Inheritance Tax on Pensions 

Draft legislation has been published regarding the proposal to charge IHT on a deceased person's unused pension as from 5^th April 2027.  Pension scheme administrators (PSAs) have been keen to minimise their involvement in assessing and paying any IHT due on pensions and this wish is reflected in the draft legislation, pushing much of the process onto the PRs and pension beneficiaries (PBs).  Whilst PRs have always had to understand a deceased’s pension arrangements to some degree, going forward there will undoubtedly be more for them to do in ensuring that all IHT due on a person’s death has been settled.

Identifying Pensions

Much work has been undertaken in the last few years by the Money and Pensions Service (an arm's length body of the DWP) and the pensions industry on the development of the pensions dashboard ecosystem which, when live (hopefully sometime towards the end of next year or early 2027), will be a really useful tool, enabling individuals to identify pensions to which they may be entitled and are not yet claiming.  At this stage, it is not clear to what extent, if at all, third parties such as PRs will be able to access a deceased person's pension information via the dashboard but given the impending changes to IHT and the obligations on PRs, one would hope that some degree of access is a logical priority for the future.  

It's also worth noting that whilst many larger pension scheme providers are already connected to the dashboards ecosystem (with the staged timetable for smaller schemes running to 31 October 2026), there are some exclusions for connection so in its infancy at least, it cannot be wholly relied upon to identify all pensions.  

In the meantime, there are existing pension search tools such as the Government's pension tracing service.

Working with PSAs

PRs have always needed to liaise with PSAs to share information, but broadly their tasks have remained separate and distinct: the PRs reporting what is necessary to HMRC and the PSAs making decisions and arrangements as to pension entitlements. The new legislation will take this further.  PRs will need to know who the PBs are as quickly as possible, which will in turn put pressure on PRs to provide the background information PSAs will require to make such decisions. It is expected that PSAs must respond with basic pension information within 4 weeks of request, but it may be challenging for them to make beneficial decisions within a 6-month timeframe (for IHT payment purposes) when they have been used to a 2-year one. 

Working with PBs

The intention is that PBs will pay any IHT referable to the pension benefit they are taking (the pension IHT). It will be for the PRs to quantify that IHT and, whilst PRs are used to calculating IHT where there are a number of different taxable entities involved (amalgamated trusts, gifts with a reservation of benefit and other lifetime gifts), adding potentially several pensions into the mix will undoubtedly make matters more intricate.  The PBs have the choice of asking the PSAs to pay the pension IHT from the pension fund direct to HMRC before receiving the balance, or they can simply request the whole amount from the PSAs on the basis that they will repay the PRs in due course. 

The liability to pay the pension IHT

What is particularly significant, however, is that it seems that the liability to pay the pension IHT sits with the PRs i.e. HMRC will look to them for payment and this is potentially problematic. Consider a scenario where the PBs are children from a first marriage and the estate passes to a second wife and the relationships are fractious.  Taken to its conclusion, the wife will suffer the burden of the pension IHT (as the estate assets are the ones the PRs will have control of and access to) until such time that PRs can successfully reclaim it from the PBs.  This is another reason to ensure that proper thought is given to selecting appropriate PRs.

Making subsequent amendments to the IHT due

Again, this is for the PRs to resolve.  For most probate practitioners, this prospect is daunting. Leaving aside how long it takes HMRC to process corrective IHT accounts and make repayments, managing revised liabilities or refunds will be onerous, especially where there are a number of taxable entities inextricably linked via the nil rate band.  PRs will have to be ever more mindful of making appropriate reserves and managing expectations on timings. 

What to consider

How pensions factor into IHT planning will change significantly.  It may now be more appropriate to spend or gift pension benefits during lifetime than seek to benefit others on death.  For those pensions schemes where there is trustee discretion as to who will receive post-death pension benefits, then reviewing and updating expressions of wishes / nominations will be essential. Where it may have been common to elect for pension benefits to pass to children and support a spouse from other assets, the spouse exemption may now be key to minimizing pension IHT.  It is not clear to what extent pension trustees will be willing to divert from a nomination in favour of children, even if all interested family members wish them to do so.

A final word for those living abroad

For pension members who are not long-term resident in the UK (Residence, Long-Term Residence and Domicile: what do they mean? - Burges Salmon) how their underlying pension investments are identified and where they are situated will become key.  Any UK situs investments could give rise to an IHT charge for deaths after 5th April 2027 and so may need to be reviewed with pension providers. 

What is particularly significant, however, is that it seems that the liability to pay the pension IHT sits with the PRs