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6 April 2027 is ‘notional pension property’ (NPP) day. That’s the day when planned reforms come into force that will make pensions ineffective as an inheritance tax (IHT) shelter. The reforms, which introduce the concept of NPP, go beyond simply creating a new tax charge: they introduce a new reporting and payment framework involving personal representatives, beneficiaries and pension schemes.
Advisers should therefore start reviewing affected clients well ahead of implementation, especially where retaining pension funds has been a key part of the estate planning strategy.
NPP?
NPP is a concept that broadly covers the value of pension benefits held for, or payable in respect of, the deceased immediately before death, subject to specific exclusions.
It’s a concept with very real implications. Personal representatives will be responsible for reporting and paying any IHT due on NPP. And once pension benefits vest in a beneficiary, that beneficiary may also become jointly and severally liable for the IHT attributable to those benefits.
What advisers should be doing now
While 6 April 2027 still seems some way off, much preparatory work ought to be done now. Below is a seven-point checklist of actions that advisers should be ticking off:
- Identify affected clients
Especially those with significant unused pension funds and estates already near or above the IHT threshold.
- Review estate planning assumptions
From 6 April 2027, pensions should no longer be assumed to sit outside the IHT estate, although some beneficiaries will remain exempt. - Review death benefit nominations
Check that nominations still reflect the client’s wishes and consider whether intended beneficiaries are exempt or non-exempt. Where relevant, revisit the role and suitability of spousal bypass trusts, particularly for deaths before age - Update cashflow, decumulation and gifting strategies
The optimal order of drawdown may change. Advisers should reassess how clients draw on pensions, ISAs (individual savings accounts), bonds and general investment accounts, and consider whether lifetime gifting from pension withdrawals is appropriate. This may include outright gifts to individuals or trusts, exempt transfers, or gifts made as normal expenditure out of income. - Consider consolidation
Where a client has multiple pensions, consolidation may help reduce the administrative burden for personal representatives, beneficiaries and - Discuss liquidity
Estates may need accessible funds to pay IHT before pension death benefits are fully distributed. Advisers should consider how the overall liability might be managed, including the possible role of whole-of-life cover written in trust. - Coordinate with legal advisers, executors and family members
Wills, trusts, powers of attorney and estate administration processes may need to be reviewed. Executors should understand that pensions may now form part of the estate reporting process.
No relief
As always, the devil is in the detail and HMRC has confirmed that several familiar IHT reliefs and options will not apply to NPP:
- Loss on sale relief will not apply;
- Business Property Relief and Agricultural Property Relief will not apply, even where the underlying assets might otherwise qualify if held outside the pension;
- the option to pay IHT by 10-year instalments will not apply;
- NPP will form part of the general component of the estate when testing eligibility for the reduced 36% IHT rate where at least 10% of the net estate is left to a qualifying charity; and
- Quick Succession Relief may apply where NPP has already suffered IHT and is then taxed again within five years.
The clock is ticking
HMRC’s technical note, first issued on 11 May and updated on 29 May, answers many of the outstanding questions advisers have been asking with regards to what happens on 6 April 2027. However, the process and administration involved remain complex. HMRC has committed to further detailed guidance, with an indicative timetable of six further deliverables running through to the spring. Staying up to date will therefore be essential for the countdown to NPP day is well and truly underway.
Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest.
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This material is not tax, legal or accounting advice and should not be relied on for tax, legal or accounting purposes. Quilter Cheviot Limited does not provide tax, legal or accounting advice. Your clients should consult their own tax, legal and accounting adviser(s) before engaging in any transaction. Trusts, estate planning, taxation and inheritance tax advice are not regulated by the Financial Conduct Authority. Tax treatment depends on an individual’s circumstances and may change in the future.
