Inheritance Tax is changing. Is your pension scheme prepared?
August 2026
The proposed changes to Inheritance Tax (IHT) on pension death benefits are more than just a tax reform; they represent a significant operational shift for pension scheme administrators.
From 6 April 2027, most unused pension funds and pension death benefits are expected to fall within the scope of IHT, fundamentally changing how death benefits are assessed, processed and paid.
While personal representatives are expected to report and arrange payment of any IHT due, pension scheme administrators will play a key role in providing information, supporting valuations, processing instructions and applying deductions correctly.
Administrators may need to support new information flows, respond to statutory requests, calculate potential IHT deductions, maintain comprehensive audit trails, make Direct Payments to HMRC and ensure benefit payments are processed correctly under the new rules.
Why this matters for pension administration
The challenge isn’t simply understanding the new IHT rules. It’s embedding them into everyday administration processes.
Death benefit cases are likely to require additional validation, structured information sharing and new decision points before benefits can be settled.
One of the key changes is the timing of information sharing. Pension administrators may need to engage with personal representatives earlier in the death benefit journey, including before formal estate documentation is available. This will require clear processes for verifying authority, sharing information securely and managing additional decision points.
Where multiple beneficiaries are involved, schemes may also need stronger controls around beneficiary allocations, tax splits and calculation evidence. Some benefits will remain outside the scope of IHT, meaning administrators will need clear rules and processes to identify which benefits are affected and which are not.
These changes are not simply a reporting exercise. They introduce new data requirements, workflow stages, beneficiary-level calculations, statutory timescales and enhanced audit requirements. Supporting IHT is likely to require more than incremental process changes; it requires purpose-built functionality designed around the complete administration journey.
A possible end-to-end IHT administration journey
At Procentia, we’ve already started assessing the impact of the proposed changes through our IntelliPen product initiative, focused on understanding both the regulatory requirements and the practical challenges facing pension scheme administrators.
Rather than adapting existing death benefit processes, our early assessment is that the new requirements will be better supported through a dedicated IHT administration workflow within our IntelliPen pensions administration and management platform. This approach should provide greater transparency, stronger controls and a more complete audit trail as the legislation develops.
While the detailed requirements are still being analysed, we expect the administration journey to include the following key stages:
- Confirm the personal representatives — Record who is authorised to act on behalf of the estate.
- Provide scheme information — Supply the required information to personal representatives and HMRC within the relevant timescales.
- Value death benefits — Identify the benefits that may be within scope of IHT and calculate their value.
- Record beneficiary allocations — Maintain beneficiary-level records, including the allocation of benefits and associated tax liabilities.
- Process withholding or payment notices — Record and action notices that affect the deduction or payment of IHT.
- Calculate and apply IHT deductions — Apply any beneficiary-specific IHT deductions before benefits are settled.
- Pay tax to HMRC — Process valid payment notices through the Pensions Direct Payment Scheme.
- Pay benefits and maintain an audit trail — Process final payments with appropriate controls, evidence and a complete audit history.
Why benefit calculations matter
The biggest challenge is unlikely to be a single calculation; it will be managing the complete process around it.
Administrators may need to calculate benefits not only in line with scheme rules, but also by beneficiary, tax treatment and payment method, placing greater emphasis on validation, consistency and auditability.
Key considerations include:
- Beneficiary-level calculations — Calculating each beneficiary’s entitlement where benefits are split.
- Tax allocation — Allocating any IHT liability correctly between beneficiaries.
- Payment processing —
- Reflecting withholding or direct payment instructions in the final benefit calculation.
- Clear audit trails — Ensuring every calculation is transparent, repeatable and supported by a complete audit trail.
Withholding and payment instructions will introduce additional operational considerations. Administrators may need to manage situations where benefits are temporarily withheld, IHT is paid directly to HMRC, or final beneficiary payments are adjusted following estate calculations.
Looking ahead…
The 2027 IHT changes are a reminder that pension administration is becoming increasingly interconnected with tax, data, workflow and member experience. Success will depend on more than understanding the legislation; it will require the right processes, controls and technology to support it.
Although April 2027 may seem a long way off, operational change of this scale cannot be left until legislation is finalised. Schemes that begin preparing now will be better placed to minimise implementation risk, test new processes with confidence and ensure they are ready to support beneficiaries from day one.
At Procentia, preparation is already underway. As the requirements become clearer, we’ll continue to share our thinking, product developments and practical insights to help our clients and schemes stay ahead of the curve.
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