Pensions to come into scope of IHT as Finance Bill approaches Royal Assent

Unused pension pots will come into scope of inheritance tax (IHT) from April 2027, after the Finance (No. 2) Bill completed the third reading stage of its passage through parliament and is set to receive Royal Assent.

In the 2024 Autumn Budget, Chancellor, Rachel Reeves, announced plans to include pensions in IHT calculations.

The second reading of the bill took place on 17 March and, as the bill is a ‘Supply Bill’, the House of Lords cannot amend it, so the committee stage, report stage, and third reading were just formalities.

Many in the pension and advice industries have raised concerns about the proposals, with the Pensions Administration Standards Association calling on the government to “take a step back” from the plans, and The Investing and Saving Alliance urging the government to consider ‘simpler alternatives’.

The House of Lords launched an inquiry on bringing pensions into scope of IHT, and it was told that the government needed to make “major changes” to its policy proposals to ensure they are implemented fairly and effectively.

Despite these concerns, the government has pressed ahead with the bill, and pensions will come into scope of IHT from April 2027.

Amendments to the bill since its inception included that personal representatives, who will have responsibility for working out the IHT due and paying it, will be able to withhold paying 50 per cent of the pension benefits for up to 15 months to provide flexibility.

Additionally, death-in-service benefits were previously only exempt for active members, but this has been widened out to include non-active members.

“The Royal Assent of the Finance Bill confirms beyond doubt that IHT on pensions is happening, with unused pension funds set to fall fully within the scope of IHT from April 2027,” said Quilter retirement specialist, Adam Cole.

“This represents one of the most significant changes to pension taxation in a decade and fundamentally alters long standing estate planning strategies.

“We have consistently highlighted that the government’s current approach risks creating significant complexity and administrative burden for grieving families, who could face lengthy delays as personal representatives gather valuations, submit forms and settle IHT on pension assets alongside the rest of the estate.

“These proposals mean the process at death is likely to become more complex, with delays also anticipated in payments to non-exempt beneficiaries.”

Cole added that advisers must start reconsidering estate planning strategies, as many would be fundamentally reshaped by the inclusion of pensions within the taxable estate.

“Most notably, options for mitigating IHT via pension preservation are narrowing, and advisers will need to revisit long held assumptions about the order in which clients draw down their assets,” he continued.

“However, there are not many advice touchpoints with clients between now and April 2027, meaning advisers have a relatively short runway to support clients through what will be a major transition in tax treatment.

“Given the challenges ahead, it is vital that advisers play a proactive role in supporting families, helping them navigate the heightened administrative burden, anticipate possible delays in accessing funds and ensure estate plans are re-aligned well ahead of implementation.”

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