- Finance (No. 2) Bill set for third reading in the House of Commons today
- Government is tabling several amendments, including to IHT on pensions legislation
- It wants to change the rule that death-in-service benefits are only exempt for an active member
- A second change will extend who can ask pension schemes to withhold paying pension benefits until the IHT bill has been sorted
- This Bill will also put into legislation the tax measures announced in last November’s Budget, such as the extension of the tax threshold freeze, new dividend tax rates (from April 2026) and the new saving tax rates (from April 2027)
Rachel Vahey, AJ Bell head of public policy, previews today’s third reading of the Finance (No. 2) Bill, including several amendments to the IHT on pensions legislation:
“Pension IHT changes debated in parliament today will shed fresh light on the complexity involved in the government’s pension IHT reforms. A key change up for discussion will be to let both current and prospective personal representatives (PRs) – those appointed to sort out any IHT due on pensions – pause the distribution of inherited pensions, retaining up to 50% for up to 15 months to cover potential IHT liabilities.
“Although this is already slated to be allowed for PRs appointed by the will, there will be numerous cases where no PR is immediately available on death to start the process to wind up the estate – perhaps because there was no will, or the nominated PR is unable or unwilling to take on the role.
“Without this legislative tweak, those who are looking to take on the role of PR may find that by the time the battle with paperwork is won and the official appointment comes through there is no money left in the pension to settle the IHT bill after it has been paid out to family or friends.
“Stopping the full pension payment makes sense if you are the one landed with paying the IHT. But it clearly creates the possibility of family feuds. Up to half the inherited pension may be held back from someone for over a year and they may get less than they expected after the tax has been paid. It’s easy to see this could become a bone of contention between squabbling siblings or stepfamilies, or other friends and family expecting to inherit some or all of the pension.
“Pension IHT legislation is massively complex, and this is just another example that illustrates how much of a headache it will be for families when someone passes away. Most PRs will be family members rather than professionals and will face a catalogue of administration and paperwork on taking on the role, just at the time they are grieving and at their most vulnerable.
“If you’re thinking about how to prepare for the changes coming in April 2027, it is well worth speaking to a financial adviser. They’ll be able to help you understand your tax position, take steps to reduce any IHT bill your family have to settle and reduce the stress involved when it comes to sorting out your estate. It’s also worth doing some pension housekeeping – consolidating your pension accounts will probably make it much simpler for the person left to sort out the paperwork and will help avoid delays that could result in a tax penalty. You should also make sure to stipulate where you want your pension to go on death. Lots of people die intestate and with no indication of where they want their pension and other assets to go when they pass.”
Background
The Finance Bill: IHT on pension funds
On Wednesday 11March, the third reading and report stage of the Finance (No. 2) Bill will take place in the House of Commons.
This Bill will put into legislation the tax measures announced in the Autumn Budget 2025, such as the extension of the tax threshold freeze, new dividend tax rates (coming in from April 2026) and the new saving tax rates (being introduced in April 2027).
It also covers the legislation for the new rules on including unused pension funds in the estate for calculation of inheritance tax (IHT) which will take effect from 6 April 2027.
The third reading is an opportunity for both the government and other MPs to table amendments to the Bill to change the legislation.
What are the key government amendments?
The government is tabling several amendments to the IHT on pensions legislation, which are expected to go through. This mainly includes ‘tidying up’ the legislation to make sure it works better in practice, but there are a few key changes to be aware of.
First, it wants to change the rule that death-in-service benefits are only exempt for an active member. This makes sense to widen it out the exemption to more members.
A second change will extend who can ask pension schemes to withhold paying pension benefits until the IHT bill has been sorted.
Withholding paying pension benefits
Under the new rules, the personal representatives will be responsible for working out the IHT due and for paying it. Some of that IHT may be due on pension benefits.
There could be cases where the pension scheme makes a payment in full to a pension beneficiary (who is not a spouse or civil partner) but the personal representative may struggle to subsequently reclaim any IHT due from the pension beneficiary. For example, in cases where the pension beneficiary is different to the estate beneficiary.
To stop this from happening, personal representatives can ask the pension to withhold paying 50% of the pension benefits for up to 15 months after the date of death. This gives them the ‘wiggle room’ to work out if IHT is due on the pension benefits, and, if so, the opportunity to ask the pension scheme to pay the IHT due before it makes the full payment to the beneficiary.
What happens if there is no personal representative?
But sometimes people die without making a will, or the will is lost, or there is other confusion over who is the personal representative. If so, an individual can apply for letters of administration to manage a deceased person’s estate. However, this generally can take up to four months or more.
So, the government wants to change the IHT on pensions legislation to allow ‘prospective personal representatives’ – those people who are applying, or who intend to apply, for letters of administration, but not yet granted – to also be able to ask pension schemes to hold off paying out all the pension benefits.
A sensible step but can it go further?
This will make it easier for those people taking on the role of personal representative to manage and pay the IHT due, without incurring additional late interest payments.
However, asking pension schemes to withhold paying pension benefits isn’t the only role for personal representatives. The pension scheme has to write out to the personal representative to give them details of the value of the pension within four weeks of being told of the member’s death.
It may be that further changes are needed to legislation or guidance to widen the role and responsibilities of prospective personal representatives.
Preparing for the new rules
Although these changes will improve the situation, to avoid delays and possible late interest payments, individuals can start to prepare for the new rules, including completing a will and making sure nominated personal representative agree to do the role.
There is a strict order of priority over who can apply to become a personal representative through letters of administration, starting with spouses and civil partners, then children, and then other relatives. However, unmarried partners and close friends generally have no automatic right to apply for letters of administration. So those who want their partner to take on the role of managing their estate on their death should make sure they complete a will.
