HMRC is set to send 40% tax bills to UK households under a new inheritance tax rule change, with six in 10 savers reportedly unaware of the impending policy. From 2027, unspent private pension wealth will be included in the value of estates, potentially leaving families with unexpected tax liabilities.
Policy Announcement and Public Awareness
Labour Party Chancellor Rachel Reeves announced the new rules in her first Budget back in 2024. However, a survey of 2,000 workers by financial consultancy Barnett Waddingham reveals that 62% of those with a defined contribution workplace pension did not know about the policy. This lack of awareness risks leaving families with unexpected tax bills of up to 40% when relatives die.
Expert Warnings on Tax Exposure
Mark Futcher, at Barnett Waddingham, highlighted an unexpected “risk for workers and their families of additional tax exposure.” Some faced “double taxation” if forced to pay income tax on top of inheritance tax. He added: “What was intended as a legacy for family and loved ones could deliver significantly less in practice.”
Andrew King, of wealth manager Evelyn Partners, noted: “Where there are several pension pots with different providers, this could not only prove a heavy administrative burden but also potentially hit the estate with interest charges.”
Government Rejects Lords Recommendation
The Labour government recently rejected a recommendation by the House of Lords to extend the time grieving families have to pay inheritance tax after the rule change to 12 months. The Lords report warned: “In many cases, the inheritance tax deadline to which personal representatives will be subject will be incompatible with the timescales on which existing pensions processes operate. It cannot be right to impose on taxpayers a timescale for payment of tax if that timescale is for many likely impossible to meet.”
Rachel Vahey, of stockbroker AJ Bell, commented: “It’s disappointing that the government has dug its heels in and isn’t even willing to consider a change to the six-month deadline to pay IHT. Adding pensions to the IHT calculation is going to prove to be an administrative nightmare for personal representatives – who are often family members appointed to work out what happens to someone’s estate when they die – at a time when they are at their most vulnerable. The six-month deadline was set in past centuries at a time when settling financial matters was generally a more straightforward process. As the number of people paying IHT continues to soar, the longer HMRC is taking to deal with the paperwork and issue IHT bills.”
