22-07-2025
Families face red tape nightmare over inheritance tax on pensions
Families will be forced to pay inheritance tax on pensions after the government pushed ahead with plans that had faced a significant backlash.
Pensions will be added to estates from April 2027 when working out whether someone's estate is liable for inheritance tax at 40 per cent in a move that will raise £1.46 billion a year by 2029-30.
HM Revenue & Customs estimates that about 10,500 estates in 2027-28 will now have to pay inheritance tax (IHT) and 38,500 will face a larger bill.
Polling earlier this month by AJ Bell, an investment service, suggested charging inheritance tax on pensions was the Labour government's most unpopular tax change since it was elected in July last year. Some 44 per cent of 2,050 adults surveyed were opposed to the change, with only 21 per cent in favour.
Renny Biggins from the Investing and Savings Alliance, a trade body that represents more than 270 financial services firms, said it was 'disappointing to see that despite significant pushback from industry, pensions will form part of IHT calculations'.
The government had originally proposed that pension schemes would have to work out and pay any inheritance tax due on pension pots, while the executors of the deceased's estate would be responsible for any other assets, such as their home or a share portfolio.
After lobbying by the pensions industry, the government has said that personal representatives, usually either solicitors or bereaved family members, will be liable for reporting and paying any inheritance tax due on pension pots. They will have to do so within six months to avoid interest being charged on overdue payments.
A summary of responses to HMRC's consultation on how the rules would work published on Monday said that 'while many respondents supported the principle of bringing pension wealth into the scope of inheritance tax, the majority strongly opposed the proposal to make pension scheme administrators liable for reporting and paying tax due on the pension component of an estate'.
Sir Steve Webb, a former pensions minister, said: 'Life is tough enough when you have just lost a loved one without having extra layers of bureaucracy on top. In future, the person dealing with the estate will need to track down all of the pensions held by the deceased which may have any balances in them, contact the schemes, collate all the information and put it into an online calculator and then work out and pay the IHT bill.
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'Complications will no doubt arise where the family member cannot track down all of the deceased's pensions or where providers are slow to supply the information needed to work out the IHT bill.'
He suggested the government should 'give serious thought' to changing the penalty rules around late payment of inheritance tax bills to ensure grieving families were not at risk of fines because of delays outside of their control that pension schemes might cause.
Webb, now a partner at the consultancy Lane Clark and Peacock, said: 'While the changes HMRC has made are undoubtedly good news for pension schemes and those who administer them, it is hard to see that they are good news for bereaved families.'
You can pass on £325,000 of assets from your estate without your beneficiaries paying any inheritance tax. This rises to £500,000 if you leave your main home to a direct descendant and your estate is worth less than £2 million. Any assets above those thresholds are usually taxed at 40 per cent.
The change will close a loophole that gave savers a uniquely tax-efficient way of passing on wealth to the next generation. Those who could afford it could use other assets to live off in retirement, leaving their pension savings untouched to be passed on inheritance tax-free.
In one piece of good news for families, the government confirmed that death-in-service benefits payable from pension schemes will be excluded from IHT.
Pete Maddern from the insurer Canada Life said: 'These benefits provide a critical short-term financial lifeline for loved ones following the death of a working-age earner. Including them in the changes risked much wider repercussions not only for grieving families, but also for the employers that provide these benefits for their workforce.'
