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Key takeaways from this article
- Withholding notices and payment notices provide new mechanisms for managing and settling pension-related IHT liabilities.
- Pension-related IHT can be paid directly from a pension scheme, from the deceased's free estate, or by pension beneficiaries.
- The method chosen can affect how benefits are distributed and how income tax is subsequently calculated and administered.
1. Background
Bringing unused pension funds into the scope of IHT from 6 April 2027 creates a practical question that did not previously arise: how is the tax paid? The legislation provides several payment mechanisms which allow IHT attributable to pension death benefits to be settled either from the pension itself, from the estate, or directly by beneficiaries.
From 6 April 2027, legal personal representatives (LPRs) or prospective personal representatives – PPRs (where there is no valid Will) will be responsible for reporting, and liable for paying, any IHT due on notional pension property (NPP). This will run alongside their broader IHT responsibilities towards the deceased’s estate. Once a pension benefit has been awarded or entitlement given to a beneficiary (sometimes called “vesting in the beneficiary”) they become jointly and severally liable for any IHT attributable to that pension. It will be important to understand whether the beneficiary is classed as exempt or non-exempt under the IHT framework.
A beneficiary's status as exempt or non-exempt will determine whether IHT is attributable to their share of the pension death benefits and whether restrictions under a withholding notice can apply.
2. Withholding notice
In bringing pensions into the scope of IHT framework, the Government recognised the lack of control LPRs/PPRs have over the distribution of pension benefits. To support the LPRs/PPRs ensure IHT liabilities are settled, legislation gives them the ability to restrict pension schemes paying out death benefits.
Where LPRs/PPRs believe there is a reasonable likelihood of IHT being due, they can issue a withholding notice to each pension scheme.
This notice instructs the pension scheme administrator not to distribute more than 50% of a non-exempt beneficiary's entitlement whilst the notice remains in force.
A withholding notice can be given to a pension scheme at any time between the date of death and 15 months after the month of death.
A withholding notice ceases to have an effect on the earliest of:
- when all the IHT and interest in respect of that scheme is paid
- the LPRs/PPRs issue a withdrawal request to the scheme
- 15 months after the month of death.
For example, if the date of death is 15 June 2027, the notice will run for a maximum period to 30 September 2028.
There is no requirement for an LPR/PPR to issue a withholding notice. Where the LPRs/PPRs do decide they wish to use them, a withholding notice will need to be sent to each pension scheme they intend to limit the amount non-exempt beneficiaries can withdraw.
A pension scheme administrator must confirm within 14 days of receipt whether a withholding notice is valid or not. If valid, the pension scheme administrator is legally required to restrict the amount of NPP payable to non-exempt beneficiaries regardless of their wishes.
As part of bringing pensions into the scope of IHT, there is a mechanism to pay the IHT directly from the pension scheme. This is called a pension direct payment scheme payment notice (payment notice).
A payment notice can only be used to settle IHT attributable to that particular pension arrangement. It cannot be used to settle IHT attributable to another pension scheme or other estate assets.
For a payment notice to be valid (binding on the pension scheme administrator) it must:
- include details of the deceased member and the IHT account reference number
- be for at least £1,000 in respect of the IHT due on that pension, including any interest
- not be more than the amount remaining under the scheme or for that non-exempt beneficiary.
Important details:
- Where this is issued by the LPRs, this can apply to the whole of the IHT applicable to the NPP under the scheme. Where this is issued by a beneficiary, this can only be applied to their share of the NPP.
- Where a valid payment notice is received, the pension scheme administrator must pay the amount specified in the notice within 35 days of receipt. If the payment is not made within 35 days, the pension scheme administrator becomes jointly and severally liable for the amount specified in the notice.
- A pension scheme administrator will act in chronological order of receipt of any payment notices received.
- A pension scheme administrator must comply with a valid payment notice from an LPR, even if a beneficiary disagrees with the IHT due being paid directly from the pension.
- It is not possible for a PPR (i.e. where there is an intestacy) to issue a payment notice until letters of administration or confirmation of executor-dative (in Scotland) have been issued by a court.
- A payment notice only applies to UK registered pension schemes so any IHT attributable to overseas pension schemes will need to paid using one of the other options.
LPRs may pay all the IHT, including that attributable to pensions, from the free estate.
Where beneficiaries of the free estate and pension differ, LPRs have a legal right to recover the pension-related IHT from the pension beneficiaries. They must do this to provide the correct amount to those who benefit under the free estate. Where the two sets of beneficiaries are the same, the pension beneficiaries may take their entitlement in full.
The pension beneficiaries can settle their IHT liability directly, either from their own funds or by withdrawing money from their inherited pension benefits.
Where the inherited pension benefits are tax free, this approach is relatively straightforward. However, additional considerations may arise where the inherited pension benefits are subject to income tax.
If a beneficiary withdraws taxable pension death benefits to fund their IHT liability, income tax may initially be deducted from the full amount withdrawn. However, the amount ultimately chargeable to income tax should be reduced by any IHT attributable to those benefits. This may result in the beneficiary needing to reclaim overpaid income tax from HMRC.
Where inherited pension benefits are taxable, beneficiaries may wish to consider whether using a payment notice to settle the IHT liability directly from the pension scheme is more efficient than making a taxable withdrawal and subsequently reclaiming overpaid income tax from HMRC.
4. Choice over method
Subject to the circumstances of the estate and pension arrangements, LPRs and beneficiaries may choose which method, or combination of methods, is used to settle the IHT liability.
The most appropriate option will depend on a range of factors, including the liquidity of the pension scheme's assets, the availability of funds within the estate, and the tax position of the beneficiaries. For example, the use of a payment notice may be difficult where the pension scheme holds illiquid assets, such as property or suspended investments.
Regardless of the method chosen to settle the IHT liability, the existing income tax treatment of pension death benefits continues to apply. Further information can be found in our Pension death benefits article.
Advisers should therefore consider both the administrative and tax implications of each payment option, including whether the chosen approach could result in a subsequent income tax reclaim being required.
Need more help?
Speak to our experienced team. You can reach them Monday to Friday, 8.30am to 4.30pm, by either calling 02380 726 010 or emailing:
- Pensions technical queries – pensionstechnical@quilter.com
- Life and trust technical queries - taxandtrusts@quilter.com
Approver: Quilter October 2026
Q 01398/206/18944
The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.