From April 2027, most unused pension funds and pension death benefits will be brought within the scope of Inheritance Tax. The change will create additional work for executors and make careful estate planning increasingly important.
Administering an estate can already involve a significant amount of work. Executors may need to identify and value assets, settle debts, calculate and pay tax, apply for probate and distribute the remaining estate to beneficiaries.
From 6 April 2027, most unused pension funds and pension death benefits will also be included within the value of the deceased person’s estate for Inheritance Tax purposes.
The reforms mean executors will have a more direct role in tracing pension arrangements, obtaining valuations and ensuring that the relevant information is included in the estate’s tax position. This is likely to be a very onerous obligation, which may catch out the unsuspecting executor.
What is changing from April 2027?
Under the current rules, unused funds in many pension schemes can usually pass to beneficiaries outside the deceased person’s estate for Inheritance Tax purposes.
For deaths occurring on or after 6 April 2027, most unused pension funds and pension death benefits will instead be taken into account when calculating the value of the estate. Death-in-service benefits payable from registered pension schemes will remain outside the new rules.
The effect will depend on the type of pension, the benefits payable, the beneficiaries and the wider value of the estate.
We have explored the broader estate-planning implications in our earlier article, Pension and inheritance tax changes from April 2027: why now is the time to review your will and estate plan. You can read this article in full here.
For executors, the key issue is how the additional pension information will be identified, gathered and incorporated into the administration of the estate.
Why will this make estate administration harder?
Executors will need to establish which pension arrangements the deceased held, contact the relevant providers and obtain details of unused funds and death benefits.
This may be relatively straightforward where records are clear and there is only one scheme. It can be more difficult where someone accumulated several workplace and personal pensions over the course of their career.
Older schemes may have merged, providers may have changed name and paperwork may no longer be readily available. Different providers may also respond at different times, delaying the point at which the executors can establish the estate’s final Inheritance Tax position.
The reforms therefore add another layer of information gathering to a process that can already involve banks, investment providers, property valuers, accountants, HMRC and the Probate Registry.
Who will deal with the tax?
Personal representatives, including executors, will be responsible for reporting and paying the Inheritance Tax due in relation to relevant pension benefits.
This is important because pension benefits may be paid directly by the pension provider to a beneficiary rather than passing through the executors’ hands.
The new rules include mechanisms intended to help address this. In some circumstances, a pension scheme administrator may be asked to withhold part of a benefit and pay the relevant tax to HMRC before releasing the balance.
However, executors will still need to understand how the pension benefits affect the estate as a whole and ensure that the correct information is reported.
Tax deadlines may add to the pressure
Inheritance Tax is generally due by the end of the sixth month after the month in which the person died. Interest can begin to accrue if the tax is not paid by that deadline.
Executors often need to begin dealing with the tax position before probate has been granted. This can be difficult where much of the estate’s value is tied up in property or other assets that cannot immediately be sold.
The pension reforms may create further delays if executors are waiting for providers to confirm valuations or beneficiary information.
Where the final figures are not yet available, executors may need to consider making a payment on account based on the information they have. This can help reduce the interest that might otherwise accrue while the estate’s liability is finalised.
The wider responsibilities of executors
Pensions will form only one part of an executor’s role.
Executors may also need to:
- locate and interpret the will;
- identify and protect the estate’s assets;
- obtain valuations;
- establish debts and other liabilities;
- complete tax reporting;
- apply for a Grant of Probate;
- collect or transfer assets;
- prepare estate accounts; and
- distribute the estate to the correct beneficiaries.
They must follow the terms of the will, act impartially and keep proper records.
Mistakes can have financial consequences. Problems may arise if an executor overlooks an asset or pension, uses an inaccurate valuation, distributes money too early or fails to settle tax and other liabilities before paying beneficiaries.
Although executors can take professional advice, they remain responsible for ensuring that the estate is administered correctly.
Choosing suitable executors
Many people appoint a spouse, adult child, sibling or close friend. This may be entirely appropriate, particularly where the estate is straightforward and well organised.
However, the choice should be based on more than personal closeness. The person appointed may need to deal with pension providers, HMRC, banks, valuers, beneficiaries and professional advisers.
A suitable executor should ideally be organised, reliable, able to handle financial information and willing to seek advice where necessary.
It is also worth considering whether two or more executors will be able to work together. Sharing the role can be helpful, but disagreements over property, tax or distributions can delay the administration.
Proposed executors should be told about the appointment and given an opportunity to consider whether they are willing to take it on.
When professional involvement may help
A solicitor can be appointed as an executor, either alongside a family member or as the sole executor.
This may be appropriate where:
- the estate is likely to be liable for Inheritance Tax;
- there are several pensions or investments;
- business or overseas assets are involved;
- the will creates a trust;
- family relationships are difficult; or
- a dispute is likely.
A solicitor does not need to be formally appointed in the will for legal support to be available. Family executors can remain in place while instructing a solicitor to assist with tax reporting, probate, estate accounts or the wider administration.
Taking advice early can be particularly helpful where executors are uncertain about how the April 2027 pension reforms affect the estate.
Making the role easier
The new rules make it increasingly important to leave clear and current information for the people who will administer your estate.
Practical steps include:
- keeping an up-to-date record of workplace and personal pensions;
- recording provider names and policy or membership details;
- reviewing pension nominations alongside your will;
- maintaining a list of bank accounts, investments, property and significant digital assets;
- keeping important documents securely and telling executors where they can be found; and
- reviewing whether the people appointed under your will remain suitable and willing to act.
It is also worth considering whether the estate will have enough readily available cash to meet any Inheritance Tax liability. An estate may be valuable while much of that value is held in property, businesses or pensions.
Preparing before the rules change
The April 2027 reforms will affect more than the amount of tax payable.
Executors will have to gather pension information, coordinate with scheme administrators and beneficiaries and bring those benefits into the estate’s wider tax calculation. This will sit alongside their existing responsibility for identifying assets, paying liabilities and distributing the estate correctly.
Reviewing your will, pension arrangements and choice of executors before the changes take effect can help ensure that your plans remain suitable and that the people appointed have the information they need.
RIAA Barker Gillette’s Private Client team advises on wills, estate planning, pensions, Inheritance Tax, probate and estate administration. We can help you understand how the reforms may affect your arrangements and take practical steps to prepare.
About the Author
James McMullan is a Partner and also heads up our Private Client team. James started his career as a family lawyer, but over the years, his practice has grown to encompass all aspects of private client law, including estate planning, Inheritance Tax, lasting powers of attorney, lifetime gifts, living wills, mental capacity issues, probate and contentious probate, trusts and, of course, wills.
James prides himself on spending sufficient time with clients at the outset of a matter to fully understand their position, needs, and objectives. He is committed to resolving disputes effectively, frequently using alternative dispute resolution (ADR). Given its costs and uncertainty, court litigation is a last resort.