Autumn budget update: further policy developments on IHT changes for pensions

Aiming to better balance the concerns of personal representatives (PRs) and pension scheme administrators (PSAs), the 2025 Autumn budget confirmed further policy developments on the expansion of IHT to pension benefits, first announced at last year’s Budget. The new provisions give a bit more control back to PRs.

Ahead of the Budget we explained the current situation with the proposed changes and some of the concerns for PRs and PSAs.

Under the previously announced policy unused pensions will be within the scope of inheritance tax (IHT) from 6 April 2027. The draft legislation published over the Summer states that it will be PRs who are primarily responsible for the reporting and payment of any IHT to HMRC once the new law takes effect on 6 April 2027. Once the PSAs have decided who will benefit from the pension pot, the said beneficiary (or beneficiaries) will be able to direct the PSA to pay IHT on “their” share of the pension funds directly to HMRC. But in practice this is not expected to help in many cases, as the decision on who will benefit is likely to be made some time after any IHT falls due. PRs, who will be the ones with the actual obligation to settle any IHT, will not have the power to ask the PSAs to pay it, although they are given some ability to recover the tax from those who ultimately inherit the pension. 

It appears that the government has listened to concerns raised by the private client industry on behalf of PRs and has made two policy announcements which improve their position (albeit they do not address all of the issues):

New policy announcements

1. PRs will have the power to direct PSAs to pay IHT direct to HMRC before they release funds to any beneficiary, and to withhold 50% of the pension funds for a period of up to 15 months after the date of death (presumably to give more time for the IHT position to be finalised).
2. PRs will be discharged from liability arising from IHT on pensions which are discovered after receipt of an HMRC clearance certificate (i.e. if the IHT position is agreed on the basis of certain pensions being relevant, and then further pensions are discovered, the PRs will be discharged from liability for IHT on the latter).

We have limited detail on either announcement so far, so these are more statements of intention than detailed policy.

PR’s power to direct PSAs to retain funds or pay direct to HMRC

From what has been published so far we understand that:

• PRs will be able to issue the new directions where they “reasonably expect inheritance tax to be due”.
• If the instruction is withdrawn or the period ends, the PSA can pay out the remaining benefits.
• These powers will not extend to exempt benefits (presumably death in service benefits and dependant’s pensions, for example), funds under £1,000 or continuing annuities.

As ever, both PSAs and PRs will be interested in the exact details of these new provisions once updated legislation is published. The detailed provisions could be in separate regulations that come later.

Implications for PRs

These developments will be welcomed by PRs to deal with some of the concerns the private wealth industry had raised. 

The ability to direct PSAs to pay IHT from the pension funds directly will, in theory, go some way to addressing one of the major issues with the previous proposals, which was that the liability for IHT on the pension sat with the PRs but they had no way of accessing the pension assets to fund it.  However, it is likely that once the detail is available there will still be remaining practical concerns over this exposure. For example, it is unclear how some PRs will demonstrate their authority to PSAs without a grant of probate to evidence their position (grants are generally not issued until IHT has been paid so by definition most PRs will not have one at the time they seek to give directions to PSAs).

The confirmation of discharge of liability once clearance is given is also good news in relation to the risk associated with ‘lost’ pensions.  Again, there may be important qualifications once the detail is available.

Implications for PSAs

These new provisions add a further layer of complexity and risk for PSAs. In practice, most estates aren’t expected to meet IHT thresholds even once pensions are included but PSAs will be concerned about an over-cautious approach by PRs. They will also need to take care as to whose instructions they accept, given that a grant of probate is unlikely to be available.

The timescales for making the IHT payments when directed by PRs will be important, particularly for schemes with illiquid assets. This will be of particular relevance to parts of the SIPP and SSAS market.

Next steps

PRs and PSAs should continue to monitor developments until the legislation is final, and to plan for these changes coming into effect. The main legislative provisions will be part of the next Finance Act, with the timescale on accompanying regulations less clear.

If you would like to discuss this topic further, please contact Alice Honeywill (pensions) or Edward Hayes (private wealth). To explore all our 2025 Budget updates and commentary see our hub.

This article was written by Megan Bruce, Alice Honeywill and Edward Hayes