From April 2027, families will be barred from claiming loss relief on pensions dragged into the inheritance tax (IHT) net, under changes confirmed by former Chancellor Rachel Reeves and now overseen by new Chancellor John Healey. The move means unused pension pots will be included in an individual’s estate for IHT purposes, but if they fall in value, families cannot claim back the difference from HMRC through “loss on sale relief”.
What the Change Means for Estates
Currently, IHT is based on the worth of an estate’s underlying assets at the date the holder dies. If an asset is sold at a loss within 12 months of death, families can claim back the tax difference from HMRC. However, this relief will not apply to pensions, according to tax experts from leading firms.
The changes were previously confirmed by Rachel Reeves, who has since been replaced by Andy Burnham as Labour leader, with MP John Healey now serving as Chancellor. Healey will oversee the implementation of these rules, which are set to take effect from April 2027.
Experts Warn of Two-Tier Tax System
Rachel Vahey, of AJ Bell, said: “Dragging unused pensions into the inheritance tax net was already a major blow for families, but HMRC’s proposed approach risks making a bad policy even worse.” She added: “Under the plans, inheritance could be subject to a two-tier tax system – estates could face higher tax bills, extra late payment interest and less flexibility at exactly the point families are already dealing with bereavement.”
Vahey also questioned HMRC’s justification: “It says these reliefs should not apply because the pension saver does not own the pension assets, yet those same assets are being pulled into the saver’s estate for IHT purposes.”
Complexity and Criticism
Adam Cole, of Quilter, described the policy as overly complex: “Two complex tax ideas are being forced together in a couple of years. It’s too complex a system, and they’ve tried to import some of the IHT regime on to pensions.” He noted that the deceased isn’t classed as owning the assets before death, which denies IHT relief, unlike other cases of IHT.
Olly Cheng, of Rathbones, went further, calling it “a wealth tax under another name. If you want to tax wealth, you go after property and pensions. Pensions are being stripped back to strictly provide a retirement income, nothing more.”
Impact on Families and Retirement Planning
For families, this means that if pension assets lose value after death, they will not be able to offset those losses against the IHT bill, potentially increasing the overall tax burden. This could particularly affect those with large pension pots invested in volatile assets, such as stocks and shares.
The change also has implications for retirement planning, as individuals may need to reconsider how they draw down their pensions to avoid leaving unused pots that could be subject to IHT without the safety net of loss relief. Financial advisers are likely to see increased demand for guidance on estate planning in light of these rules.
Reactions and Future Outlook
The proposals have drawn criticism from tax experts who argue that the policy is inconsistent and penalises families at a difficult time. The two-tier system could lead to higher tax bills and additional financial strain on bereaved families.
As the April 2027 implementation date approaches, further details and guidance from HMRC are expected. In the meantime, families and advisers are urged to review their estate plans and consider the potential impact of these changes on their inheritance tax liabilities.
