It is not new news that from April 2027, unused pension funds and certain death benefits will be brought within the scope of Inheritance Tax (IHT). Joshua Croft, Senior Technical Consultant at AJ Bell, talks to us about pension withholding notices and how they provide a practical way to ensure that tax liabilities are met without disrupting the fair distribution of assets.
The changes from April are major from the long‑standing position where pensions were typically outside the estate for IHT purposes. As a result, pension wealth may now contribute directly to an estate’s IHT liability.
This change creates a practical risk that pension benefits could be distributed to beneficiaries before any associated IHT is settled.
If this happens, personal representatives may be left with insufficient liquidity within the estate and forced to rely on non‑pension assets or recover funds from beneficiaries.
A withholding notice addresses this risk. It allows a personal representative to instruct a pension scheme administrator to retain up to 50% of a beneficiary’s entitlement.
This ensures that sufficient value remains available to meet any IHT liability arising from pension assets.
Withholding notices are designed for specific circumstances. A personal representative (or prospective representative in cases of intestacy) can require a scheme administrator to retain up to 50% of benefits, even if scheme rules would not ordinarily allow this.
HMRC’s stated position is that withholding notices are not intended to become a routine part of estate administration. The legislation reflects this, indicating that the power should only be used where the personal representative knows, or reasonably believes, that IHT may be due.
In principle, this implies a considered, case‑by‑case assessment of the estate, taking into account both pension and non‑pension assets.
However, there is a growing view within the industry that, in practice, withholding notices may be used more regularly.
Given the potential risk of pension benefits being paid out before IHT liabilities are settled, and the difficulty of recovering funds from beneficiaries, those administering estates may choose to act more cautiously, using notices proactively to minimise risk wherever there is uncertainty.
The purpose of withholding is to prevent situations where IHT liabilities linked to pension wealth must be settled using other estate assets after the pension benefits have already been distributed.
By retaining part of the pension fund, personal representatives maintain better control over liquidity and can meet liabilities without disadvantaging other beneficiaries.
At the same time, the rules aim to preserve access. Scheme administrators are expected to release up to 50% of entitlements promptly, ensuring beneficiaries are not unnecessarily restricted. Exempt or excluded benefits should continue to be paid without delay.
A withholding notice can be issued by a formal personal representative or a prospective representative where no will exists. This allows action to be taken early, even before a grant of representation is obtained.
Timing is important. Notices can be given from the date of death up to 15 months after the end of the month in which death occurred. In practice, they should be issued as early as possible where IHT exposure is anticipated.
Once beneficiaries are identified, administrators are not expected to delay payments without a notice in place.
A notice ceases automatically once the IHT (and any interest) is paid, the notice is withdrawn, or the 15‑month period expires, whichever occurs first.
A withholding notice has no effect on the underlying cash and investments, which can continue to be dealt with according to the scheme rules or the scheme administrator’s normal procedures.
Withholding notices are not a blanket control mechanism but a targeted response to a specific risk created by the April 2027 IHT changes.
For many estates, they will not be needed. However, where pension wealth is significant, they provide a practical way to ensure that tax liabilities are met without disrupting the fair distribution of assets.
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