City sounds the alarm on pension inheritance tax upheaval
City grandees have raised the alarm over government plans to overhaul key rules over pensions and inheritance tax.
The sweeping reforms will allow scheme providers to retain half an outstanding pension pot to ensure executors can cover potential bills for inheritance tax, or IHT.
Due to take effect in April next year, the changes will bring unused pension pots into the IHT net for the first time, with wealth previously sheltered from it to be taxed at 40 per cent.
In a technical note released on Monday, HMRC confirmed that it will allow personal representatives, typically executors, to instruct a pension scheme to withhold up to 50 per cent of an individual’s benefits to cover the IHT liability.
Withholding capital
The department said the ability to withhold money is intended to be used “where the personal representative knows, or has reason to believe, that inheritance tax may be due on the notional pension property”.
Pension experts have warned in response that the changes raise “practical concerns” including for executors “managing incomplete information at a time of bereavement”, with families often facing fragmented records and multiple workplace schemes.
Penny Cogher, pensions partner at Irwin Mitchell, said:“Pension scheme administrators will be looking for scheme members to take more upfront responsibility with their pension savings in this regard and for all ages of scheme members to have clear, up to date, expression of wishes forms lodged online with the pension providers.
“So, on being notified of a death, the pension providers can rapidly assess the position and make a decision as to who should receive the pension benefits.”
But Irwin Mitchell noted that individuals are yet to receive help from the Pension Dashboard, which is designed to reconnect individuals with lost pensions.
‘Real risk for families’
Others raised concerns it could lead to family disputes as beneficiaries are likely to be waiting longer to receive their full entitlement while any potential IHT bill is worked out.
The issue can become increasingly fractured when relatives are executors and are expected to distribute pension wealth to others, in particular as they are jointly liable for paying IHT from the pension fund.
Naomi Neville, partner at Irwin Mitchell private client advisory, said: “Executors are being asked to gather, value and share information that can be difficult to access, at a time when clarity and reassurance matter most.
“The real risk for families is delay, uncertainty and outcomes that differ from what they reasonably expected when estate plans were put in place.
“HMRC has indicated that this technical note forms part of a wider programme of work, with further regulations and public‑facing guidance expected ahead of implementation from April 2027. In the meantime, families may wish to review pension arrangements, consolidation and estate plans to reduce the risk of delay and surprise.”
Interest on unpaid inheritance tax also starts to be charged after six months, leaving families with a tight window, before it kicks in but officials noted that commercial properties held in SIPPs are much harder to value, slowing down administration and potentially tipping it over the six month window.