From April 2027, unused pensions will be brought within the scope of inheritance tax (IHT), and under the new Labour government led by Prime Minister Andy Burnham and Chancellor John Healey, three important IHT reliefs will not apply to assets held inside pensions. This could create a two-tier tax system, according to investment firm AJ Bell.
Two-tier tax system warning
AJ Bell warns that under the plans, inheritance could be subject to a two-tier tax system, where important reliefs available on other assets are denied on assets sitting inside a pension. Households could lose access to loss on sale relief, business property relief, agricultural property relief, and the option to pay IHT in instalments on certain assets, solely because they are held within a pension.
The changes were first announced by the previous Labour Party administration and are due to take effect under the current Labour government. From April 2027, unused pensions will not only be subject to IHT but may also face income tax upon withdrawal, as per current policy.
Three reliefs affected
Rachel Vahey, a spokesperson for AJ Bell, outlined the three specific reliefs that will not apply to pensions. She explained that loss on sale relief allows executors to claim back some inheritance tax if certain assets are sold for less than they were worth at the time of death. For example, if shares are valued at one price on the date of death but later sold for less, the estate may be able to use the lower sale price instead and get an IHT refund.
Business property relief and agricultural property relief, which are designed to reduce the IHT burden on qualifying business or agricultural assets, will also be unavailable for assets held within a pension. This means that even if a pension holds such assets, the reliefs that would normally apply are denied.
Instalment option removed
Vahey also highlighted that HMRC allows executors to pay IHT on certain assets, including commercial property, in up to ten equal yearly instalments. This flexibility helps estates avoid selling illiquid assets quickly, though late payment interest is usually charged on the outstanding balance. However, if that commercial property is held within a pension, such flexibility is not available. Instead, the executor could be looking for a quick sale to settle the IHT bill as speedily as possible.
The removal of these reliefs could have significant implications for estates with pension assets, potentially forcing executors to sell assets at unfavourable times or face higher tax bills. As the April 2027 date approaches, households and financial advisers will need to review their estate planning strategies in light of these changes.
