Under a new rule change effective from April 2027, pension savers facing inheritance tax bills may find up to 50% of their pension pots withheld by schemes. HMRC has confirmed that pension schemes can retain this portion to cover potential inheritance tax (IHT) liabilities.
How the Withholding Notice Works
HMRC stated that schemes should consider retaining funds where the personal representative knows or has reason to believe that inheritance tax may be due on the notional pension property. The withholding notice allows a personal representative to instruct a pension scheme administrator to withhold up to 50% of an individual's benefit entitlement under the scheme.
However, HMRC emphasized that most estates will not have an IHT liability. The withholding is intended only for a small number of cases and should not be used routinely or on a precautionary basis. Payments of excluded benefits and payments made to exempt beneficiaries are not subject to withholding.
Expert Reactions
Sir Steve Webb, former pensions minister and partner at LCP, noted that beneficiaries will likely face longer waits to receive their full entitlement while potential IHT bills are worked out. He added that this reduces the risk of pensions being paid out in full before IHT is paid.
Rachel Vahey, head of public policy at AJ Bell, expressed concern that estate disputes already cause family friction, and this change will exacerbate matters. David Denton, tax specialist at Quilter Cheviot, called the assertion that the rule won't affect many pensions an understatement, stating it is too early to know the full impact.
Protecting Personal Representatives
HMRC explained that retaining funds helps protect personal representatives and other estate beneficiaries from using non-pension assets to meet IHT liabilities. During the withholding period, no benefit may be paid if more than 50% of a beneficiary's entitlement has already been paid, or if making the payment would exceed that threshold. Schemes must ensure beneficiaries can access up to 50% of their benefits promptly while a withholding notice is in place, and payments of exempt or excluded benefits must be made as soon as possible.
