Steve Berridge, Technical Services Manager at IFGL, reviews the latest HMRC guidance and outlines the key issues advisers and paraplanners should be discussing with clients ahead of April 2027.
One of the more controversial pieces of pension legislation published in recent years is the forthcoming change to how pensions are treated on death for inheritance tax. Announced in October 2024, these changes are now less than seven months away.
To recap, from April 2027, most unused pension funds and death benefits will be included in the value of the deceased person’s estate for Inheritance Tax (IHT) purposes. The main exception will be Defined Benefit Scheme Pensions.
In the run up to April 2027, HMRC has issued some technical notes, providing further details on a process which is expected to be complex for personal representatives (those responsible for the valuing of an estate and payment of Inheritance Tax) to grapple with.
The second of these Technical Notes was issued on 27 August.
The new note deals with the five stages at which personal representatives and pension scheme administrators will need to share information.
It also provides more information about establishing the identity of personal representatives and prospective personal representatives.
Other sections deal with valuing pensions, the initial assessment of IHT liability and how it is apportioned. Also, the subject of exempt beneficiaries and issues that might arise when a beneficiary is a trust.
Headline points worth restating at this juncture are as follows;
- The personal representatives are responsible for arranging the calculation of the estate value, the value of any IHT payable and the payment of that IHT. The period allowed before interest starts to apply, is six months from the date of death, so it is a tight schedule.
- The personal representatives may request that 50% of the pension value is withheld for a maximum period of 15 months to cover the payment of any potential IHT liability.
- There will be a “Pensions direct payment scheme” where personal representatives may issue a “Payment Notice” to the pension administrator, instructing them to pay the IHT and any interest due directly to HMRC.
- Excluded benefits (those on which IHT is not payable) include dependant’s scheme pensions, Trivial commutation, Joint life, lifetime annuities and death in service benefits.
- Some beneficiaries will be “potentially exempt beneficiaries”. These are, charities or registered clubs, a surviving spouse or civil partner and any other exempt beneficiaries.
- The charge to IHT is apportioned between the different elements which make up the estate, including the pension.
- HMRC has confirmed that gifts made from pension income may qualify for the “normal expenditure out of income” exemption, provided the same three conditions outlined in Section 21 of the Inheritance Tax Act 1984 (IHTA) apply.
There will be a third Technical Note issued later in the autumn and this is expected to provide specific guidance for international issues which arise where not all the parties are long-term UK residents, along with the interaction of IHT with income tax.
This will obviously be of particular interest to our overseas clients and advisers and we will provide a further article on this in due course.
In the meantime, we recommend both our clients and advisors to review their “Expression of Wish” forms to ensure that the beneficiaries named in those reflect their wishes and provide the best possible outcome in mitigating any potential IHT liability.
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