Writing your will? Remember to choose your executors with care

HMRC has published fresh information on the mechanics of collecting inheritance tax (IHT) on pensions.(1)

In the October 2024 Budget, the Chancellor announced that most pension death benefits would become potentially liable for IHT from 6 April 2027. However, it was not until March 2026 that the relevant primary legislation was passed into law. Even that is not the end of the story, as HMRC now must pass regulations to make the new rules work, then consult on and produce “detailed guidance and other supporting materials”. The final elements are not due until next spring, uncomfortably close to the April 2027 start date.

The protracted process reflects the complexities in developing a system that works for:

• The personal representatives (PRs) – normally the will-appointed executors,

• The pension scheme’s administrators and trustees,

• The beneficiaries of the pension death benefits, lump sum and/or income, and

• HMRC, which could be demanding both IHT and income tax on the pension benefits.

At the end of May, HMRC issued an extensive ‘technical note’ setting out its view of the current state of play. This highlighted the significant new responsibilities placed on PRs:

IHT liability: The PRs will be primarily responsible for reporting on and paying any IHT due on pension benefits. However, once the pension scheme determines that an individual is entitled to a lump sum or a pension, that beneficiary also becomes jointly and severally liable. This means that if the PRs do not pay any IHT due, the beneficiary will have to.

Withholding funds: As anyone who has experienced estate administration will know, it takes time to track down the deceased’s assets and their value at the date of death. To help cover this inevitable delay, PRs will be able to request that a pension scheme withholds up to 50% of a beneficiary’s entitlement as a reserve against a potential IHT liability. The maximum withholding period is 15 months. However, a withholding notice cannot apply to beneficiaries classed as exempt (mainly surviving spouses and civil partners) nor to a limited range of excluded benefits (such as dependants’ scheme pensions, joint life annuities and death in service payments).

The new duties for PRs mean that you might wish to review who you have appointed as your executors. If you have no will, then the changes to IHT have given you another reason for making one.

Sources:

(1) https://www.gov.uk/government/publications/inheritance-tax-on-pensions-technical-note/technical-note-inheritance-tax-on-pensions

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate wills or estate planning advice.

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