HMRC is giving pension schemes insufficient time to prepare for changes which will bring pensions into the inheritance tax net next year, according to consultants LCP.
Their stark warning comes as HMRC publishes a technical note today, setting out further details of how this new regime will operate. This includes information on the process for calculating and collecting inheritance tax liabilities on unused DC pension pots.
HMRC has confirmed that further information will be provided “at intervals” between now and next April, with final guidance only expected in Spring 2027 – just weeks before the new system comes in.
LCP says this risks being too late, and could leave schemes struggling to update member communications and information ahead of this new regime.
Today’s clarification sets out details of how this work. It confirms that from April 2027, unspent DC pension pots and certain other pensions will be within scope of inheritance tax (IHT). This means a personal representative (PR) will need to track down all of a deceased person’s pensions and contact each pension scheme or provider.
The scheme will also need to provide information on the pension value and who is due to receive the money. Transfers to spouses and civil partners who are long-term UK residents will remain exempt from IHT.
The HMRC states that the deceased representative will combine this information with information about the rest of the estate and use a new online HMRC tool to work out what IHT is due, if any.
If IHT is due, the PR will need to notify each pension scheme of their share of the IHT bill.
HMRC has confirmed that in order to ensure money is available to meet this tax bill the PR will be able to instruct pension schemes to withhold up to 50 per cent of the pension until the IHT has been settled. Today’s bulletin says that this power will often be used quite early in the process, but should only be used where the PR has ‘good reason’ to think that IHT will eventually be due.
The PR – and any beneficiary of the pension – will also be able to instruct the pension scheme or provider to pay IHT directly to HMRC on their behalf.
LCP says HMRC update also confirms that death-in-service benefits are excluded, as expected. Nevertheless, there will be a requirement to report these benefits. LCP says this could be a burden for life-assurance-only schemes that currently do little or no reporting.
The bullet also confirms there will be an onus on employers and workplace pension schemes to ascertain if those on long-term sickness and other absences qualify. It says it anticipates that this will sometimes require legal advice.
New clarifications have also been provided on more complex death in service benefits – for example where the benefit has two or more components.
Tim Camfield, principal at LCP, said there was welcome clarification for bereaved families around quicker access to part of pension benefits.
“There is helpful clarity here for bereaved families that half of the pension should generally be able to be paid out quickly,” he said.
“Pensions have often been a vital source of income for families following a death as they are outside the estate so can be accessed quickly. The estate — and from April 2027 the other half of the pension too — can often be in limbo for far too long for beneficiaries.”
However, he warned that schemes still lacked the detailed operational guidance needed ahead of implementation.
“We have concerns about the impact of further guidance being issued in spring 2027, just weeks before actual cases begin to arise,” he said.
“HMRC’s consultative approach is welcome, but time is running out for HMRC to give schemes the detailed information which they will need to implement a new system which starts in less than a year’s time.”
