HMRC Technical Note on IHT: how the pensions direct payment scheme will work
In less than a year, pension benefits will come within scope for the purposes of inheritance tax. A new technical note published by HM Revenue & Customs helpfully adds ‘flesh to the bones’ of the new rules, including the pensions direct payment scheme; and more guidance should be released in the coming months.
What’s changing?
Under the existing rules, for deaths up to 5 April 2027 pension benefits are not taken into account when the estate is valued for inheritance tax (IHT) purposes.
From 6 April 2027 most pension benefits paid from registered pension schemes - including death in service benefits - will become chargeable to IHT. However, the following will remain ringfenced:
· Dependants’ scheme pensions, including pensions paid to the deceased’s spouse, children or other dependants
· All death in service benefits – even if they are discretionary
The expected increase in IHT receipts by the Treasury as a result of the change is forecast to be as much as £1.46bn by 2029-2030.
The change will not, however, impact a large number of deceased estates (the Office for Budget Responsibility anticipates it will bring an additional 1.5% of UK deaths into the total number of estates liable for IHT); but the changes are significant - particularly for the pensions industry and tax, private client and wealth planning lawyers and clients.
Technical note
Until now, there have been unanswered questions as to how the rules will apply in practice. There will undoubtedly be cases involving complex issues and nuances that will need to be resolved.
The government has published a Technical Note (11 May 2026) which provides some detail. It covers, for example, how notional pension property is to be calculated and valued; defines what are ‘excluded benefits’; residency issues; additional information on exempt beneficiaries (eg transfer between spouses; and withholding notices.
Pensions direct payment scheme
One area, for example, that has raised concerns is that the personal representatives will be responsible for reporting and paying any IHT due on death benefits /unused pension funds. IHT is required to be paid within 6 months of the last day of the month of death.
In practice, there will be situations (as there are already) where there are insufficient liquid assets to pay the IHT within the deadline. HMRC allows for deferred payments or payments by instalments, but interest will accrue.
The Technical Note sets out how the pensions direct payment scheme will work. It is an optional scheme, and allows the PRs (nb: not prospective PRs) and pension beneficiaries (including trustees) to issue a payment notice. This will require the pension scheme administrator to pay the IHT and interest due on the notional pension property held within the scheme directly to HMRC.
Once they have received a valid payment notice, the scheme administrator will be required to pay the amount specified in the notice within 35 days. Further detail about the scheme, such as payment notices and what they should contain, is in the guidance.
If a pension scheme is discovered sometime after death, the PRs will need to obtain a valuation on death and amend an IHT account already submitted by way of a corrective account (in the same way as when other assets are later identified during the estate administration).
This is important and technical change to the IHT framework. For expert advice on how the changes could impact you, contact the specialist tax team at NGM Tax on [ ]
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