HM Revenue and Customs (HMRC) has confirmed that pension schemes will be permitted to withhold up to half of a person’s retirement savings to cover potential inheritance tax (IHT) liabilities under sweeping reforms due to take effect in April 2027.
The changes, first set out in the 2024 Budget, will bring unused pension pots into the inheritance tax net for the first time.
Pension wealth previously sheltered from tax will instead face the standard 40 per cent IHT rate when passed on after death.
HMRC said schemes should consider retaining funds “where the personal representative knows, or has reason to believe, that inheritance tax may be due on the notional pension property”.
The move has triggered concern among advisers about delays to inheritance payments and the heightened risk of family disputes.
Sir Steve Webb, former Liberal Democrat pensions minister and now a partner at consultancy LCP, has said beneficiaries could face long waits before receiving their full inheritance.
He said: “Beneficiaries are likely to find they have longer to wait to receive their full entitlement, while any potential IHT bill is worked out.”
He noted that the ability to retain pension funds until tax is settled could help executors avoid paying out too early.
“It will reduce the risk that the pension is paid out in full before the IHT has been paid.”
HMRC says pension schemes can retain half of savings for inheritance tax payments
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But he warned personal representatives would need to act quickly: “Personal representatives will need to know about this power and exercise it promptly, otherwise pension schemes will press ahead with making payments.”
Rachel Vahey, head of public policy at AJ Bell, said the reforms risked inflaming already‑fraught probate situations.
She said: “It is an unfortunate reality that estate disputes already cause family friction, and this will only exacerbate matters.
“People rightly worry that their financial legacy can cause family rifts.”
Tax Burden as a percentage of GDP | GETTY
The issue may be particularly sensitive where executors responsible for settling inheritance tax are also relatives expected to distribute pension wealth to others.
Andy King, pension technical specialist at Evelyn Partners, said schemes may be instructed to retain up to 50 per cent of pension assets for as long as 15 months while liabilities are calculated.
Interest on unpaid inheritance tax begins accruing after six months.
Treasury estimates suggest 10,500 additional estates will fall into inheritance tax by 2027–28 because of the reforms.
A further 38,500 estates already paying IHT are expected to face higher bills, with average liabilities rising by around £34,000.
The changes apply to estates above the £325,000 nil‑rate band.
David Denton, tax specialist at Quilter Cheviot, questioned whether the Government had fully grasped the scale of the impact.
He said: “While this note says the 50 per cent withholding rule won’t affect many pensions, this is a real understatement.
“It is simply too early to know.”
The full consequences of bringing pension savings into the inheritance tax system remain unclear as families, advisers and providers prepare for the April 2027 overhaul.