HMRC publishes detail of how the IHT pension changes will work in practice

On 11 May 2026, HMRC published its much awaited technical policy paper on the inheritance tax (IHT) pension changes being introduced on 6 April 2027 by the Finance Act 2026, when most unused pension funds and death benefits from registered schemes will be brought within scope of IHT. This was shortly followed by HMRC’s 18 May 2026 consultation on the regulations which cover how information on IHT and pensions will be shared between schemes, personal representatives (PRs) and beneficiaries.

What does the policy paper cover? 

The policy paper provides important detail on how the new regime is intended to operate in practice and how scheme administrators (usually the trustee), personal representatives (PRs) and beneficiaries will navigate what will be a more complex post-death process. The paper is wide-ranging and covers: 

• the overarching framework (including the “notional pension property” model, vesting, liability and administrative processes such as how schemes will verify the identity of PRs);
• which pension benefits are within scope and how they will be valued, exclusions, and exempt beneficiaries;
• information-sharing requirements between schemes, PRs and beneficiaries;
• the new withholding notice and direct payment regimes;
• the interaction with income tax (that part of the benefit subject to IHT and interest will not be taxed as income) and the lump sum death benefit allowance;
• what will happen if there are changes to the value of the estate; and
• a range of supporting matters including probate, changes to estate values, PRs obtaining a discharge from liability certificate and the application of IHT reliefs and payment options.

Core framework and scope

The regime is built around the concept of “notional pension property”, being the value of pension death benefits attributable to IHT with ‘deductions’ for the value of specific exclusions (dependants’ scheme pensions, trivial commutation, joint life annuities and certain death in service benefits). 

For money purchase arrangements, the value of notional pension property will broadly reflect the value of the member’s fund that may or must be used to provide death benefits and includes cash balance arrangements. For defined benefit arrangements, it includes lump sums that must be or may reasonably be expected (for example, under an augmentation power) to be paid together with certain guaranteed pension payments, known as scheme continuation payments. 

HMRC confirms when notional pension property is regarded as vesting in beneficiaries. For discretionary benefits, this will generally be when trustees exercise their discretion; for non discretionary benefits, when the beneficiary is identified. From that point, beneficiaries and PRs are jointly and severally liable for any IHT due. 

The paper provides helpful clarification on the death in service benefit carve out. Broadly, the exclusion applies where benefits are payable in respect of a member in current employment (or other work) immediately before death. In more borderline cases such as career breaks, long-term sickness or redundancy, it is up to the employer and the schemes to determine whether the conditions are met. 

Certain beneficiary payments will remain exempt from IHT, such as transfers between spouses and civil partners that are long-term UK residents. The Inheritance Tax Act 1984 provides full details. 

A key practical point for trustees is that, although scheme administrators are not usually liable for IHT, they can become jointly and severally liable where they fail to act on certain notices (for example, withholding or payment notices). This reinforces the need for sufficiently effective and robust death benefit payment processes. 

PRs must take reasonable steps to identify pension benefits. If they become aware of a scheme some time after death, they must still obtain valuations and beneficiary details. Schemes can ‘encourage’ members to maintain details of their pension scheme benefits to assist with identification.

Valuation requirements

Broadly, schemes will need to provide an open market value at the date of death (or an estimate where necessary), with follow up confirmation once final values are available. 

Information sharing requirements

Information including that relating to the valuation of notional pension property, exempt & non-exempt beneficiaries and their identification, and on the lump sum death benefit allowance will have to be provided within prescribed timescales (typically linked to 28 day and 14 day deadlines, depending on the stage of the process).

Payment mechanics and scheme interaction

The new regime introduces two key mechanisms that will require schemes to either withhold payment of benefits or pay any IHT due:

• Withholding notices: Any time from death until 15 months after death, PRs can require schemes to withhold up to 50% of a beneficiary’s entitlement where they know or reasonably believe that IHT may be due. The notice takes effect until it is withdrawn or, if later, 15 months after death.
• Direct payment notices: PRs or beneficiaries can also direct schemes to pay IHT (and interest) to HMRC where the IHT due is at least £1,000. Payment must be made within 35 days of receipt of the notice. There are no restrictions on timing but there must be sufficient funds left to be valid.

Both mechanisms are subject to timing and operational requirements and liability consequences. Notably, failure to comply can expose the scheme administrator to joint and several liability for IHT. HMRC will provide templates that schemes can use for notice purposes. 

Next steps

Further detail is still to come. In particular:

• the finalised information sharing regulations expected in summer 2026;
• HMRC guidance (including tools for PRs) will follow in autumn/winter 2026/2027; and
• a broader communications exercise for impacted parties will take place before 6 April 2027. 

What this means in practice

The new framework will fundamentally change how schemes administer death benefits. Trustees should expect a more structured and time critical process following a member’s death, with greater interaction between schemes, PRs and beneficiaries. Schemes will need to be able to:

• identify and categorise beneficiaries and benefits correctly (including excluded benefits);
• obtain and provide valuations within statutory timescales;
• respond to information requests and share data in a compliant manner; and
• operate the new withholding and direct payment mechanisms where required.

From a governance perspective, trustees should focus on administrator readiness. This will include reviewing whether existing processes, systems and service agreements can support the new requirements. Scheme and member communications will also need some thought and will need amending as appropriate.

The April 2027 implementation date is less than a year away and with further guidance still to come this could leave limited lead in time. Early and regular engagement with administrators will therefore be key to ensuring schemes are ready for the new regime.