In a technical note published this month, the tax office confirmed further details on how the new legislation will work to help taxpayers prepare for the changes.
The timeline for new pension tax rules
The technical note published by HMRC has provided further detail on how the new regime will operate, but this isn't the full legislation.
Towards the end of 2026, HMRC will begin a public campaign to explain the changes to everyone affected before publishing final official guidance and support materials in spring 2027.
'We have concerns about the impact of further guidance being issued in spring 2027, just weeks before actual cases begin to arise.'Time is running out for HMRC to give schemes the detailed information they will need to implement a new system that starts in less than a year’s time.'
A Treasury spokesperson said: 'We continue to incentivise pension savings for their intended purpose of funding retirement instead of being openly used as a vehicle to transfer wealth. More than 90% of estates each year will continue to pay no inheritance tax after these and other changes.'
Find out more:What rules have been confirmed?
Here are the key details from HMRC's technical note:
Inheritance tax will be taken before income tax
HMRC has clarified how inheritance tax will interact with income tax to avoid 'double taxation' on the same pension pot.
Currently, if you die after the age of 75, your beneficiaries pay income tax on any withdrawals from your pension. Under the new rules, where inheritance tax is due, it will be applied to the pension first.
The beneficiary will then be eligible for a statutory deduction, meaning they'll only pay income tax on the remaining amount after inheritance tax has been settled. This aims to make sure that the total tax bill is lower than it would have been if both taxes were applied to the full original value of the pension.
Find out more:Families face extra admin
Under the new system, personal representatives (loved ones or executors dealing with the estate) will be responsible for locating all of the deceased's pensions and contacting providers for valuations.
Currently, pension providers wait for official probate documents before they will discuss a deceased person's account. However, from next year, providers will be required to share information much earlier, allowing personal representatives to begin the process using alternative proof, such as the will and death certificate.
Using a new HMRC online tool – which has not yet been launched – the personal representative will combine these figures with the rest of the estate to calculate any tax due and notify each pension scheme of its specific share of the bill.
Find out more:Deadline for paying tax will remain the same
Personal representatives will still face a six-month window from the end of the month of death to settle any inheritance tax due.
To make sure funds are available for this, executors can tell providers to withhold up to 50% of pension benefits for up to 15 months. This power can be used quite early in the process, where the executor has ‘good reason’ to think that inheritance tax will eventually be due. If there’s no will, someone who expects to act as executor may, with evidence, issue a withholding notice.
Both the personal representative and the beneficiaries also have the option to request that the pension provider pay any tax due directly to HMRC.
Find out more:Exemptions are still in place
Anything left to a surviving spouse or civil partner – including pensions – will remain 100% exempt from inheritance tax.
HMRC has also clarified that most 'death in service' benefits – lump sums paid out by an employer if you die while still working – will remain exempt. However, they may need to be reported to HMRC by pension scheme administrators.
Likewise, the government has confirmed that 'dependants' scheme pensions,' which provide a fixed regular income to a child or dependant rather than a lump sum, will generally remain outside the scope of inheritance tax.
However, there are important caveats to this exemption. The person receiving the pension must meet the strict legal definition of a 'dependant' at the time of your death. This means they must be a spouse, a civil partner, or a child under the age of 23 – unless they have a disability.
Find out more:Overseas pensions will be affected too
The update clarifies that the new rules aren't just for UK-based pots – they also apply to many overseas pensions held by UK residents. If you have a Qualifying Recognised Overseas Pension Scheme (QROPS), these funds will generally be treated the same way as UK pensions and included in your estate.
Executors will need to take extra care to get valuations from international providers, as these must be converted into sterling based on the exchange rate at the date of death.
Find out more:Simple ways to prepare for inheritance tax changes
While some estate planning strategies are complex, Sir Steve Webb – former pensions minister and current partner at consultancy LCP – has shared three simple steps to get you started and ease the burden for your loved ones:
Organise your pensions paperwork: Create a master document for your financial information:Arrange power of attorney:source https://www.which.co.uk/news/article/inheritance-tax-on-pensions-how-the-new-rules-will-work-in-practice-aBHIj1Y7kBmv