From 6 April 2027, one of the most significant changes to estate administration in recent years will take effect. Pension funds will be included in the Inheritance Tax (IHT) calculation. This will mean that personal representatives (PRs) will play a much more prominent role in administering estates.
At the moment, most pensions sit outside a person’s estate for IHT purposes. From April 2027, they will generally need to be considered alongside other assets, such as property, savings and investments, when the IHT calculation is made.
PRs are the people responsible for dealing with someone’s estate after death. They are usually executors named in a will or administrators where there is no will. Under the new rules, PRs will need to gather pension information, report the values to HMRC and make sure any IHT due is dealt with properly.
A More Complicated Probate Process
The changes are expected to increase both the complexity and length of estate administration. PRs will need to contact pension providers early in the process to obtain valuations and establish who the pension beneficiaries are. This information will not always be readily available, particularly where someone has several pension arrangements.
One of the biggest challenges is timing. IHT is normally due within six months of the end of the month of death. However, pension providers may take time to provide accurate valuations, which could mean PRs have to use estimates and make corrections later. This could increase administration costs and create additional work for families who are already dealing with bereavement.
Don’t Forget the TTFAC
A Transitional Tax-Free Amount Certificate (TTFAC) is separate from the IHT calculation, but it may still be relevant when pension death benefits are being reviewed. In simple terms, a TTFAC can help confirm how much tax-free pension allowance someone has already used. It does not change the IHT calculation, but it may affect how pension death benefits are taxed.
This is mainly relevant where the deceased had taken pension benefits before 6 April 2024 and may have taken less tax-free cash than the standard calculation assumes. If a valid TTFAC exists, it may help beneficiaries receive the correct tax treatment. If no certificate was obtained before the first relevant pension benefit event after 5 April 2024, it may no longer be possible to apply for one.
When reviewing pension benefits, PRs should check whether a TTFAC exists and whether it could affect the tax treatment of any pension death benefits. If a TTFAC does not exist, it may still be possible to apply for one.
The April 2027 changes will undoubtedly increase the burden on personal representatives. Early planning, comprehensive record-keeping and professional advice are likely to become more important than ever. Multiple pension plans can cause problems, as they may involve dealing with several providers alongside potentially complicated calculations relating to the TTFAC.
As a pension specialist, this is an area I can help with. If you would like to discuss how these changes may affect an estate, please get in touch.
