How the 2027 pension inheritance tax changes will affect your client’s estate plans

Estate planning discussions pertaining to pensions have until now generally started from the same position: pensions are outside the scope of the Inheritance Tax (IHT) net.

Those discussions will need to change. Following the enactment of the Finance Act 2026, from 6 April 2027, pensions will have some exposure to IHT. With the recent publication of HMRC’s Technical Note, we now have more clarity on what that exposure will look like.

What is changing?

For deaths occurring on or after 6 April 2027, the Finance Act 2026 requires certain pension-related value to be included in the IHT estate through the concept of “notional pension property” i.e., broadly speaking, what someone is entitled to from their pension, after deduction of “excluded benefits” (the “pension”).

The change applies to registered pension schemes, qualifying non-UK pension schemes and section 615(3) schemes.

What is excluded from the change?

The change is not wholesale. Several categories are carved out as “excluded benefits”: dependants’ pensions; specific trivial commutation payments; certain annuity arrangements; and death in service benefits. Transfers to spouses, civil partners and charities also require separate analysis, because those payments may still be included in the value of the pension, but have the benefit of an exemption from IHT.

How will pensions be valued?

Pension scheme administrators will be expected to provide an open market value of the pension at the date of death to the deceased’s executors. Where that is not possible, estimates (and their basis) can be provided, but an accurate open market value will need to follow. Scheme administrators will need to comply with strict timescales in providing valuations, be they estimated or final.

The complexity in valuing the pension will vary according to the circumstances.

What role do pension nomination letters play?

Nomination letters have always had a role to play with pensions, particularly with discretionary schemes.

For IHT purposes, under the new regime, beneficiaries of a pension will be treated as being entitled to the pension when their interest ‘vests’. When that will be depends on the kind of pension scheme: with discretionary schemes, that will be when the trustees exercise their discretion; and with non-discretionary schemes, vesting will take place when the scheme rules deem a beneficiary to qualify as such.

Nomination letters may be relied upon by trustees to determine to whom the pension is ultimately paid, and that can be important for who is liable to pay IHT on the pension (as discussed below). However, it is important to remember that such letters are never (or very rarely) binding.

How is the tax on the pension paid?

Where IHT is due on the pension, there will be two different tools to assist payment of the tax:

• Where executors are (broadly speaking) comfortable that IHT is due on the pension, they can give notice of that to the scheme administrator in a Withholding Notice. Receipt of this requires scheme administrators to retain 50% of a (non-exempt) pension beneficiary’s entitlement: that will allow IHT due on the pension to be settled from the pension, and not deplete the estate value by using other assets.
• Executors and beneficiaries will be able to direct the administrators of registered pension schemes to pay IHT due on the pension directly to HMRC under the Pensions Direct Payment Scheme (“PDPS”). This appears similar to the Direct Payment Scheme which operates for bank, savings or investment accounts. Importantly, the PDPS will be available for use before Confirmation / Probate is granted.

It is vital to note that any IHT due on the pension needs to be paid by the same deadline as IHT due on the rest of an estate: no later than the end of the sixth month after the deceased’s death. The use of Withholding Notices and the PDPS is subject to specific timescales and they must be borne in mind in managing the settlement of the estate’s total IHT liability timeously.

Who will be liable for the tax?

The primary responsibility for reporting and paying IHT due on the pension will lie with the deceased’s executors. There are situations where liability may be extended:

• When a beneficiary’s interest in the pension vests, the beneficiary will become jointly liable with the deceased’s executors, for settlement of the IHT due on the pension. This is likely to arise where the pension is paid directly to a beneficiary, instead of being paid to the executors.
• Scheme administrators can also be held jointly liable with beneficiaries and executors but only in very limited circumstances, namely when they fail to observe a Withholding Notice, or implement a payment under the PDPS.