Changes to the administrative process needed to bring pensions into the scope of inheritance tax (IHT) are expected to "ease the pain" for personal representatives (PRs), who were previously told they would be required to handle the reporting and payment of IHT.

The Budget documents confirmed that PRs will be able to direct pension scheme administrators to withhold 50 per cent of taxable benefits for up to 15 months and pay IHT due in certain circumstances.

PRs will therefore be discharged from a liability for payment of IHT on pensions discovered after they have received clearance from HMRC.

This will be legislated for in Finance Bill 2025/26, due to be published next week, and take effect from 6 April 2027.

AJ Bell head of public policy, Rachel Vahey, said that the "tweak" will give personal representatives a little bit of flexibility, following concerns that the initial proposals could prove too much of a burden.

"Some would have been worried that only allowing the pension beneficiary to direct the payment of inheritance tax due on the pension would lead some PRs on a merry dance trying to reclaim the money if the pension beneficiary withdrew all the funds," she admitted.

However, Vahey clarified that although this will give the personal representatives the power to hold back 50 per cent of the pension benefit to pay HMRC the IHT due, "it doesn’t get away from the hard cold truth that bringing pensions into the net of IHT is going to lead to some administrative nightmares for those responsible for winding up the affairs of loved ones".
 
“A better solution would have been to find a completely different way of taxing pension benefits on death – something most of the pension industry have spent the last year urging HMRC to do," she argued.

"It’s disappointing that HMRC has stubbornly chosen again to stick with the hard administrative path, rather than thinking about the grieving families who will sadly get caught up in this administrative torment at the time they are most vulnerable.”
 

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