HMRC provides clarity on pension inheritance tax reforms, but practical concerns remain

The latest HMRC guidance has shed more light on how pensions will be brought within the inheritance tax net from April 2027, but specialists at Irwin Mitchell believe several aspects of the regime could still lead to delays, disputes and uncertainty for families administering estates.

Published at the end of August, the second technical note from HMRC provides further detail on the operation of the new rules, including information sharing between pension scheme administrators (PSAs), personal representatives (PRs – where Executors under a will able to act), and Prospective Personal Representatives (Prospective PRs – where no such executor), and the handling of IHT liabilities linked to pension assets. 

However, Irwin Mitchell believes several practical concerns remain unresolved.

Direct payment of IHT

Irwin Mitchell believes one of the most significant issues highlighted by the technical note relates to the payment of inheritance tax. Under the proposals, PRs will be able to direct PSAs to pay inheritance tax directly to HMRC. However, Prospective PRs will not have the same power.

The national firm says this could create significant difficulties in intestacy cases, where there is no valid will, where an executor is unable to act because of death or incapacity, or where disputes delay the grant process.

Naomi Neville, Partner in Irwin Mitchell's Private Client Advisory team, said:

 

"This is one of the most significant unresolved issues in the new regime. Where there is no executor able to act, or where probate is delayed by a dispute, Prospective PRs may need to fund inheritance tax liabilities from estate assets, or potentially through borrowing, before they are able to obtain a grant.

 

"That creates the potential for delay, additional cost and uncertainty, while increasing the scope for disputes between estates and pension beneficiaries over who ultimately bears the tax burden."

Information sharing

The latest guidance provides much more detail on how PSAs, PRs and Prospective PRs will be expected to share information when administering estates.

Claire-Marie Cornford, National Head of the Will, Trust and Estate Disputes team at Irwin Mitchell, said: 

 

"The additional detail around information sharing between PSAs, PRs and Prospective PRs is welcome, but many estates are far from straightforward.

 

"In disputed cases there can be genuine concerns about who has access to information and whether sharing it at a particular stage may prejudice one side's position. While transparency is important, the practical operation of these rules could become contentious in some estates."

Withholding notices

HMRC has also provided further detail on the process allowing PRs and Prospective PRs to issue a withholding notice requiring a PSA to retain up to 50% of pension funds to cover potential inheritance tax liabilities.

Naomi Neville said: 

 

"The withholding notice process is likely to become one of the most important tools for managing inheritance tax risk under the new regime.

 

"The additional guidance is welcome, but important practical questions remain. In particular, PRs and Prospective PRs will need confidence that withholding part of a pension fund provides sufficient protection where inheritance tax liabilities are uncertain or estates are more complex."

Estate clearance

The technical note also indicates that estate clearance applications generally cannot be made until at least 12 months after death. Irwin Mitchell says that, while many estates take much longer, this could create difficulties for simpler estates that might otherwise be administered and distributed much sooner.

Claire-Marie Cornford added: 

 

"Many estates can be administered and distributed within a year. If clearance cannot generally be sought until at least 12 months after death, there is a risk that some straightforward estates could be delayed unnecessarily.

 

"Families and beneficiaries will understandably want certainty, particularly where the administration of an estate could otherwise have been brought to a conclusion much sooner."

Further clarity needed

Naomi Neville added: 

"HMRC has answered a number of important questions, but the latest guidance also highlights areas where further clarification will be needed before the reforms take effect.

 

"The new framework needs to work not only for straightforward estates but also for intestacies, disputed estates and situations where PRs cannot immediately act. Those are common scenarios in practice and they cannot be treated as exceptions."