Families are being warned they could face unexpected inheritance tax (IHT) bills years after an estate has been settled, as the Labour government, under Andy Burnham and John Healey, presses ahead with pension tax changes. The Treasury has been alerted to several practical flaws in the new rules, which take effect from April 2027 and make pensions liable for IHT.
Pension Pots Drawn Into IHT Net
Under the current rules, the first £325,000 of an estate is tax-free, known as the nil-rate band. However, from 2027, pension funds will be included in the value of an estate for IHT purposes. Estate administrators will need to apportion the nil-rate band between estate assets and pension funds to calculate the tax due on each retirement pot.
The problem arises when a pension is discovered after the estate has been wound up. In such cases, HMRC would need to revisit the calculations, potentially leading to additional tax demands and leaving families in a state of uncertainty.
Experts Highlight Practical Flaws
Accountancy firm Blick Rothenberg has raised concerns about the approach. Nimesh Shah, a partner at the firm, said: “One of the fundamental aims of the probate and IHT process should be to provide finality. But the proposed approach creates uncertainty for families and makes estate administration more difficult, and indefinitely open-ended.”
Adam Cole, of wealth manager Quilter, echoed these concerns, saying: “This is another reminder of the value of keeping clear records of pension arrangements and, where appropriate, consolidating pots during retirement planning to make them easier for families to identify and administer.”
Call for Flat-Rate Tax on Lost Pensions
Ruth Sadlier, of the Chartered Institute of Taxation (CIOT), suggested an alternative approach: “The alternative is that you leave uncertainty for every other beneficiary. Is it fair to them if they’re told five years later that an amount of money they’ve already spent needs to be clawed back? By taxing the newly discovered pension at a flat rate, without the need for recalculations, the pension beneficiary also receives their money quicker.”
Experts are urging families to maintain thorough records of all pension arrangements and to consider consolidating pots during retirement planning to mitigate potential complications. The changes, initially pursued by former Chancellor Rachel Reeves, are part of a broader Labour government policy that continues under Burnham and Healey.
