Inheritance Tax on pensions: what the 2027 changes mean for your estate

Executors and Administrators

Executors handle the estates of deceased persons where there is a will and Administrators are appointed if someone dies intestate (i.e. without leaving a will). They are collectively known as Personal Representatives and are responsible for ascertaining all the assets (including pension funds) and liabilities of the deceased, paying the Inheritance Tax due, obtaining probate. They administer the estate, sell assets as necessary, pay the liabilities and distribute the estate according to the will or intestacy rules.

The Personal Representatives are responsible for calculating the Inheritance Tax due by the deceased. If that tax is due on all or part of the notional pension property they can serve a withholding notice requiring the relevant provider or providers to set aside up to 50% of the value of the pension as at the date of death. The notice cannot cover any payments the provider has already paid to beneficiaries.

Before they can serve such a notice they will need to provide to the pension provider the relevant documents  to establish their credentials. A withholding notice can be given at any time between date of death and 15 months after the end of the month in which the deceased died, but it only has effect within that period. HMRC expects that, where required, a withholding notice will be given early in the process. Once beneficiaries are determined, pension scheme administrators can distribute benefits to beneficiaries where they have not received a withholding notice, even if it is still within the 15 month period. A withholding notice can also be withdrawn by the personal representatives.

Pension providers

After the Personal Representatives have received a withholding notice and/or a payment notice the pension providers become jointly and severally liable to the appropriate amount of Inheritance Tax and interest.

During the period when a withholding notice has effect, no benefit may be paid if more than 50% of a beneficiary’s entitlement has already been paid, or if making the payment would result in more than 50% of that entitlement being paid. This protects the use of non‑pension assets to meet the Inheritance Tax liability.

Pension providers have to supply to Personal Representatives the open market value of their notional pension property (on an estimated basis initially if necessary). Time limits apply.

Excluded benefits

Such benefits do not form part of the deceased’s notional pension property. They comprise:

• Dependants’ scheme pension
• Trivial commutation
• Joint life annuities
• Death in service benefits

Exempt beneficiaries

Payments to certain types of beneficiaries are exempt from Inheritance Tax, such as transfers between spouses and civil partners, where both are long-term UK residents. Withholding notices cannot apply to benefits due to exempt beneficiaries.

Personal representatives must include in their account submitted to HMRC the values which scheme administrators provide and claim the appropriate exemption.

Residency status, situs of pension assets and Inheritance Tax

For long-term UK residents, Inheritance Tax arises on notional pension property within registered pension schemes, qualifying non-UK pension schemes, or section 615(3) schemes (set up to provide superannuation benefits for non-resident scheme members by employers whose business is wholly or partly outside the UK), regardless of where the scheme is situated or established, subject to any exemptions or reliefs.

Different rules apply to non-long-term UK residents.

Withholding and payment notices cannot apply to qualifying non-UK pension schemes, or section 615(3) schemes.

How can Gravita help?

Gravita can advise, following the abolition of domicile as a determining factor for tax, on the impact of the new regime for long term UK residents. We can also assist with preparing the Inheritance Tax forms and liaising with the pension providers to obtain the necessary information as well as advising on reliefs available on all assets comprised in the estate and with arranging for payment of the tax due.