Financial experts are sounding the alarm over a major tax change that could leave thousands of UK households and pensioners facing unexpected six-figure bills. The warning centres on a significant overhaul of Inheritance Tax rules announced by the Labour government, which is set to create a severe liquidity crisis for many families.
The Core of the Rule Change
In the 2024 Autumn Budget, Chancellor Rachel Reeves announced that from 6 April 2027, unused pension savings will be included within a person's estate for Inheritance Tax purposes. This move reverses the long-standing system where unused pension funds could typically be passed to beneficiaries free of Inheritance Tax.
The change means that if the total value of a deceased person's estate—which will now include their untouched pension pot—exceeds the IHT threshold, the excess will be taxed at the standard rate of 40%. For those with substantial pension savings, this could easily translate into tax demands worth hundreds of thousands of pounds.
A Looming Liquidity Crisis for Property-Heavy Pensions
The starkest warning comes from financial advisory firm Bowmore Financial Planning. They highlight a critical problem for the 54,387 pension plans currently holding commercial property assets. Unlike cash or shares, property is an illiquid asset that can take many months, or even years, to sell at market value.
Mark Incledon, CEO of Bowmore Financial Planning, emphasised that these assets were "never designed to be accessed quickly." He stated that applying Inheritance Tax to these pots fundamentally alters the risk of holding commercial property within a pension wrapper.
Families may be forced to sell these property assets rapidly to raise the cash needed to settle the HMRC bill within the executor's deadline. This pressure could result in "fire-sale" prices, dramatically reducing the overall value of the inheritance intended for loved ones.
The situation is even more complex for the 1,367 holders of Self-Invested Personal Pensions (SIPPs) with property located overseas. Navigating legal systems in foreign jurisdictions can make liquidating these assets promptly an immense challenge.
Broader Consequences and Industry Concerns
Critics of the policy shift argue it unfairly penalises individuals who have saved diligently for retirement with the aim of providing financial security for their families. There is a growing concern that the rule change will trigger a surge in people purchasing annuities, simply to avoid leaving behind a large, taxable pension pot upon death.
This alert arrives amid other tax pressures on households. HMRC is preparing to dispatch so-called "brown envelopes" to around 300,000 people concerning minor tax demands. Furthermore, a fast-approaching deadline for self-assessment tax returns at the end of January adds to the financial administration burden for many.
The combination of these factors presents a perfect storm, where prudent savers could find their carefully built legacies significantly eroded by sudden and substantial tax liabilities tied to hard-to-sell assets.
