UK households are being warned they could face sudden and substantial inheritance tax bills running into hundreds of thousands of pounds due to a significant rule change announced by the government.
What is Changing with Pension Inheritance Tax?
In the 2024 Autumn Budget, Chancellor Rachel Reeves confirmed a pivotal shift in how pension savings are treated upon death. The new rules, scheduled to take effect from 6 April 2027, will mean that unused pension savings may be included in an individual's estate for Inheritance Tax (IHT) purposes.
This marks a stark departure from the current system. At present, pensions not drawn upon, such as those held in schemes like The People’s Pension, are typically passed to beneficiaries free of IHT at the discretion of the pension trustees.
The Liquidity Crisis Facing Families
Financial experts are raising the alarm that this change could create severe cash flow problems for many families. The issue is particularly acute for pensions that hold commercial property or other hard-to-sell assets.
According to figures from the Financial Conduct Authority (FCA), a substantial 54,387 pension plans currently include commercial property holdings. These assets are notoriously illiquid and can take a long time to sell at market value.
Mark Incledon, chief executive officer at Bowmore Financial Planning, explained the core problem: "Commercial property can be very slow to sell but in the past that has been less of a problem as there was no IHT bill to pay on property held in a pension."
He added, "Introducing IHT on pensions fundamentally changes the risk profile of holding commercial property inside a SIPP. These assets were never designed to be accessed quickly, and with the changes to IHT rules families could suddenly find themselves trying to raise a six-figure tax bill without the liquidity to do so."
Wider Consequences and Additional Complications
The pressure to generate cash quickly to settle an IHT bill could force families to sell property assets at a discount, thereby reducing the overall value of their pension inheritance.
The situation may be even more complex for the 1,367 Self-Invested Personal Pension (SIPP) plans identified by the FCA that include overseas property. Legal complications in foreign jurisdictions can make selling these assets an even longer and more difficult process.
This looming change places a new emphasis on forward-thinking estate and pension planning. Families with significant pension wealth, especially those tied up in property, are urged to review their arrangements well before the 2027 deadline to avoid being caught in a potential liquidity trap.
