Finance (No. 2) Bill - Inheritance Tax on Pensions

Our Product Manager, Natasha Moss gives her first impressions of the key take aways from the newly published Finance (No. 2) Bill.

"The Government’s new Finance (No. 2) Bill confirms that certain pension benefits will now fall under Inheritance Tax (IHT). It replaces the July 2025 draft and introduces “notional pension property” to ensure only the right pension funds are taxed.  For defined contribution schemes, notional pension property is broadly the value of a member’s pot at death, minus any excluded benefits such as payments to exempt beneficiaries or charities.

The Bill also sets out two new notices for Pension Scheme Administrators: a withholding notice from Personal Representatives (allowing up to 50% of taxable benefits to be held back for up to 15 months if IHT may be due) and a payment notice from either PRs or beneficiaries to settle IHT directly from the scheme.

A new first-come-first-served process will apply where multiple notices overlap, and if pension scheme administrators don’t respond within 35 days, they become jointly liable for the tax.

If extra pension funds are found after an estate is settled, any further IHT will fall to the beneficiary.

HMRC plans to release a detailed Pensions Newsletter in early 2026 to address many of the questions raised during consultation and workshops."