STEP says it welcomes improvements to inheritance tax on pensions but warns of unworkable complexity, unfair interest charges and the ignoring of existing, proven methods for paying inheritance tax (IHT).
The professional body for trust and estate practitioners says it is continuing to press the government to simplify its proposed changes to how IHT is applied to pensions. From April 2027, most unused pension funds and pension death benefits will be included in the value of a deceased person’s estate for IHT purposes. These rules apply only to pension death benefits and do not extend to death-in-service schemes.
HMRC has recently published a technical note on IHT on pensions, alongside a government’s consultation on inheritance tax on pensions.
In its response STEP warned the proposed framework remains fundamentally flawed, overly complicated, and heavily skewed toward the perspective of pension scheme administrators (PSAs). The result of which could lead to significant probate delays, deter people from acting as executors, increase costs, create unintended tax consequences for grieving families and legal risks for those managing a deceased person’s estate; potentially causing estate beneficiaries to inherit less than the deceased intended. In its response, STEP has put forward recommendations and is calling for an alternative framework.
Emily Deane TEP, STEP’s Technical Counsel and Head of Government Affairs, said: “The government has made genuine progress in addressing some of the industry’s initial concerns, and the additional detail provided in its recent technical note is helpful. However, these changes significantly increase the burden on executors who are navigating the loss of a loved one. At what is already a difficult time, individuals may be expected to track down multiple pension arrangements, engage with providers before probate, and deal with complex and evolving tax requirements. What is needed is a fair system that works for all parties involved, and without simplifications, there is a real risk of delays, higher costs and growing reluctance to take on the executor role.”
Ian Bond TEP, member of STEP’s UK Technical Committee and Head of Legal at Dignity Legal Services supports STEP’s call for simplification, saying: “The government must simplify the IHT on pensions framework so tax can be paid fairly and practically from pension funds themselves, rather than leaving executors and bereaved families to manage complex liabilities on assets they may not control. What is needed is a process that ordinary executors can actually use in real life, not just one that works on paper.”
STEP said it recognised the government has responded to earlier concerns raised and welcomed the further clarification provided in HMRC’s technical note which addresses some of the concerns that personal representatives (PRs) could be liable for IHT on pensions they do not control, although only in certain circumstances and subject to restrictions.
But the professional body warned:
“In practice, the technical note doesn’t fully address the underlying complexity and the potentially significant liabilities and risks for ordinary people trying to handle the estates of friends and loved ones. The new processes introduced in HMRC’s technical note also depend on consistent and timely responses from pension providers. Delays or variations in practice could directly impact probate timelines and tax compliance. Significant elements of the system, including detailed guidance, are still being developed and are not expected to be finalised until closer to implementation. This leaves a prolonged period of uncertainty for families and practitioners.”
According to STEP, ahead of the inheritance tax on pensions changes coming into place, a number of issues remain, including:
- Automatic interest: Because payment notices cannot be submitted until probate or letters of administration have been granted, the proposed system will automatically incur interest on unpaid IHT, effectively penalising grieving families for standard administrative processing times.
- Timing misalignments: Pension scheme administrators (PSAs) may take up to two years to determine beneficiaries, yet withholding notices cease to be effective just 15 months after the end of the month of death. This mismatch allows PSAs to distribute pensions before PRs have the opportunity to issue a payment notice, leaving PRs exposed to tax liabilities on assets they do not control.
- Classification risks: The framework assumes PSAs and PRs can easily identify if a beneficiary is exempt for IHT purposes early on. In reality, PSAs often lack the necessary factual and legal information such as a beneficiary’s personal status or residence creating a substantial risk of over-withholding or under-withholding tax.
- Cash flow and recovery difficulties: Without a fully workable direct payment process, the burden of paying IHT on pensions will initially fall on the deceased’s free estate. Recovering this tax from pension beneficiaries could prove incredibly difficult or uneconomical, especially if beneficiaries are unknown, located overseas, or uncooperative.
Under the new rules, executors will need to track down and engage with all of a deceased person’s pension arrangements, often across multiple providers, and bring these into the IHT calculation. If further pensions are discovered later, this could force a reallocation of nil-rate bands and change beneficiaries’ tax liabilities after administration is already underway, with limited protection for PRs who have acted in good faith. They may not even know who will benefit from the pension until after the IHT payment deadline.
There is also currently limited clarity on what constitutes ‘reasonable steps’ to identify all pension arrangements, increasing the risk of uncertainty and delay for PRs. This represents a significant expansion of the role, especially for family members with no prior experience; risking deterring people from acting as executors or stepping back from the role and increasing the likelihood of disputes.
Jo Summers TEP, STEP member and Partner at Jurit, added: “In practice, we expect this to slow estate administration down. Pensions are not always easy to identify, and getting consistent, timely information from different providers can be challenging. Even with the new mechanisms, there is a risk that executors are left managing multiple moving parts, with tax deadlines running ahead of the information they need. Measures such as allowing part of a pension to be withheld may help with cash flow, but they also risk delaying payments and creating uncertainty for beneficiaries, while leaving executors to make difficult decisions with incomplete information.
“The new rules may also deter people from investing in pensions given that, from April 2027, the changes introduce a huge amount of complexity with no IHT advantage. Despite the income tax relief for pension contributions, it may be far simpler for people to put their savings into Individual Savings Accounts (ISAs), for instance, which have always been subject to IHT but are dealt with as part of the estate and dealt with in the usual way.”
To improve clarity and fairness, STEP has put forward a number of recommendations to HMRC and the government to help ensure the system is workable in practice, including:
- Calculating IHT at the pension fund level: STEP recommends that IHT should be calculated and paid directly from the pension fund, rather than making PRs responsible for managing the tax for each individual pension beneficiary. Under the current proposals, PRs would pay the balance of the IHT from the “free estate” and then attempt to recover those funds from the pension beneficiaries. Calculating the tax at the fund level prevents the unfair scenario where PRs must drain estate funds to pay the tax, only to abandon recovery attempts if the pension beneficiaries are uncooperative, located overseas, or the recovery costs simply outweigh the tax owed.
- Extending the Direct Payment Scheme: STEP strongly proposes extending the existing scheme to cover IHT on pensions so that PSAs can be instructed to pay the tax directly to HMRC. This change would allow the tax to be paid from the pension within the six-month period after death, avoiding the automatic accrual of interest that HMRC’s proposed system would trigger.
- Automatic grant on credit: Because the proposed 35-day window for PSAs to pay the IHT is entirely out of the PRs’ control, STEP suggests HMRC should issue an automatic grant on credit. This ensures that estate and pension beneficiaries are not financially penalised by administrative delays on the part of the PSA.
Emily Deane TEP concluded: “These reforms are going ahead, but there is still time to make them work better in practice and without overwhelming people with unnecessary complexity. STEP is actively engaging with HMRC and will continue to push for simplification and improvements that bring clarity, workability and fairness.”
