Labour has been warned that plans to bring unused pension pots under the scope of inheritance tax (IHT) could result in “significant delays and costs”. Unused pension funds and some death benefits will be included in estates for IHT purposes from April 2027, creating a six-month deadline for personal representatives (PR) that could manifest as an “administrative nightmare”. A report from the House of Lords Economic Affairs Bill Subcommittee has cautioned Chancellor Rachel Reeves against the measures, warning they would place huge burdens on PRs, who are often family members appointed to work out what happens to someone’s estate when they die.
The subcommittee instead recommended that the IHT deadline on pension assets be extended to 12 months for a transitional period, and that a statutory “safe harbour” from late payment interest be implemented, where PRs can show they were delayed by circumstances beyond their control. “It cannot be right to impose a timescale for payment of tax if that timescale is, for many, impossible to meet,” the report said.
Peers were particularly concerned that PRs could be held liable for IHT on pension assets they cannot control or access within the existing timeframe.
Rachel Vahey, head of public policy at investment firm AJ Bell, said the new rules could prove to be an “administrative nightmare” imposed on people “when they are at their most vulnerable”.
“AJ Bell and the wider pensions and financial advice industry argued long and hard that there were far simpler and easier ways of achieving the policy and financial aims that would sidestep this distress,” she added.
“But, as the House of Lords report points out, the government failed to listen to concerns of stakeholders early on, with the result that they are now tweaking rules late in the day to help ease the administrative burden.
“There could be a myriad of reasons why PRs fail in their task, from lack of prompt information from pension schemes through to the challenges posed where a large proportion of the pension fund is held in illiquid assets such as commercial property.”
Ms Vahey also called for the IHT payment deadline to be extended from six to 12 months on a permanent basis and “not as a transitionary sticking plaster”.
“The six-month deadline was set in past centuries at a time when settling financial matters was generally a more straightfroward process,” she said. “As the number of people paying IHT continues to soar, the longer HMRC is taking to deal with the paperwork and issue IHT bills.
“We are now saddled with this unwiedly legislation. HMRC has already listened to pleas and changed the rules to allow PRs to ask pension schemes to pay the IHT due on their pension. But more changes are needed if we are to spare grieving families administrative pain and distress.”
Ms Vahey also pointed to the impact of interest charges on late tax payments, with HMRC currently charging interest at 4% above the Bank of England base rate, which is equivalent to 7.75% and has been as high as 8.5% over the last year.
The Government has not yet formally responded to the sub-committee’s recommendation to extend the IHT deadline.