HMRC confirmed pension schemes could withhold up to 50% of inherited pension death benefits for up to 15 months to cover inheritance tax bills from April 2027, under new pensions reform rules
Rachel Reeves has been slammed for “sinking to a new low” after HMRC revealed how a fresh inheritance tax regulation affecting certain pensions will function from April 2027. The condemnation came from TV presenter Cristo Foufas, who posted on X: “Every time I think Rachel Reeves can’t sink lower.”
He was reacting to a message by internet personality Neil McCoy-Ward, who alleged pension schemes will be permitted to hold back up to 50% of a person’s retirement savings for up to 15 months to cover potential inheritance tax bills. Mr McCoy-Ward suggested families could be denied access to funds while funeral costs and other expenses accumulate.
The regulation in question concerns how inheritance tax will apply to certain pension death benefits from April 2027, following amendments announced in the 2024 Budget.
However, HMRC’s published technical note makes clear that this is not a blanket rule and will only apply in limited circumstances.
Under the new framework, a personal representative, such as the executor of a will, can issue a “withholding notice” to a pension scheme administrator, reports the Express.
This can only happen where they know, or reasonably believe, that inheritance tax may be due on the deceased’s pension.
Most estates will not have an inheritance tax liability, and HMRC states withholding is not intended to be used routinely or as a precaution. Even when a withholding notice is issued, beneficiaries must still be able to promptly access up to 50% of their entitlement. The scheme cannot withhold more than half of what each beneficiary is due.
The notice can only apply between the date of death and 15 months after the end of the month in which the person passed away.
It automatically ends once inheritance tax is paid, the notice is withdrawn, or the 15-month period expires, whichever happens first.
Importantly, the guidance clarifies that holding back funds in this manner helps shield personal representatives and other beneficiaries from having to utilise non-pension assets to settle any inheritance tax bill.
In simpler terms, without the ability to withhold part of the pension, families could receive the full amount, only to be hit with a tax demand later on. They might then have to source the money from savings, property or other assets.
Payments to exempt beneficiaries and certain excluded benefits are not subject to withholding at all.
The legislation also stipulates that pension scheme administrators should not delay distributing benefits if they have not received a valid withholding notice.
While critics argue the change represents a new tax grab, the operational detail published by HMRC presents the rule as a protective measure.
It ensures any inheritance tax due can be settled from the pension itself, rather than leaving executors personally liable or forcing families to foot the bill from elsewhere.
Very few pensions are anticipated to be affected, as the measure only applies where inheritance tax is genuinely due on the estate.
Final guidance is set to be released in spring 2027, prior to the rule being implemented in April 2027.
A spokesperson for HM Treasury told the Express: “Pensions savings should be used for their intended purpose of funding retirement instead of being openly used as a vehicle to transfer wealth.
“More than 90% of estates each year will continue to pay no inheritance tax after these and other changes.”
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