Reforms to the inheritance tax pension will cause the tax collector and bereaved families to receive their money later

Despite concerns that it will be more difficult for executors to manage an estate and pay HMRC, the government is moving forward with plans to impose inheritance tax on pensions

Experts have cautioned that the government's pension inheritance tax (IHT) reforms will discourage professionals from assisting in estate administration, which will ultimately postpone payments to taxpayers and bereaved families.

The risks associated with the government's plans to include pensions in an estate for IHT starting in April 2027 have been discussed by tax experts with the House of Lords.

The contentious IHT reforms were introduced by Chancellor Rachel Reeves in her 2024 Autumn Budget, and they are currently being reviewed by parliament as part of the draft Finance Bill, despite concerns about their complexity and ambiguity.

This week, a House of Lords Finance Bill Subcommittee began an investigation into the changes, highlighting problems that befall bereaved families and professionals in the field.

The government's explanation of the IHT pension reforms.

As of right now, the Finance Bill suggests that starting in April 2027, a pension will be included in the estate's value for IHT purposes.

This will not only make financial planning more difficult, but it will also make it more difficult for those in charge of managing an estate and making sure beneficiaries receive any money or assets that have been bequeathed to them.

In accordance with the modifications, a personal representativeusually the administrator or executor of an estatewill be in charge of gathering data on pension values in order to settle any outstanding inheritance taxes.

Inheritance tax and estate valuation have always been the responsibilities of personal representatives.

However, there have been cautions expressed to the House of Lords inquiry that adding pensions to an estate creates additional challenges.

Six-month IHT regulation.

At the moment, inheritance taxes on an estate must be paid within six months of the death of the individual, failing which an 8% tax will be applied.

The timetable is already limited before you have to account for locating pension information, according to Ian Bond, a member of the Law Society's wills and equity committee.

"Things are not always in the best of order, and people rarely die neatly," he said.

Many people have multiple pensions, and it is the responsibility of personal representatives to locate them.

As soon as a person passes away, the IHT clock begins to run. If IHT is not paid within six months of death, interest rates will be charged. Even though it is brief already, adding pensions makes things much more challenging.

"We appreciate the government's plans to share information about pension plans, but we don't know exactly what information administrators will give us.

"It must be standardized and kept sharpish to avoid causing delays in estate administration."

Families experience delays in inheritance.

Advisors to executors may also be reluctant to approve distributions because of uncertainty surrounding pension valuations and over-reliefs, such as whether funds are going to a spouse.

Conflicts may also arise when an executor is acting on behalf of beneficiaries of an estate who might not be the same as the pension beneficiary.

The Society of Trust and Estate Practitioners member John McArthur, a partner at the law firm Gillespie Macandrew, stated that this could make it "nearly impossible to complete an estate."

According to him, advisors to executors will want to make it clear that there is no longer any inheritance tax obligation, which could lead to delays and make things more difficult for beneficiaries who are already grieving.

John Bunker, a chartered tax adviser and consultant solicitor at Irwin Mitchell who represents the Chartered Institute of Taxation, went on to say that concerns about inaccurate valuations may discourage professionals from entering the field, depriving families of advice and, eventually, assets that may be due to them.

Bond cautioned that since pensions are an asset outside of their control, professional representatives might not want to be held accountable for inheritance tax.

The taxman's delays.

Bunker cautions that the resolution of estates and, eventually, the payment of taxes will be delayed in the absence of a market for qualified representatives.

"HMRC is going to lose tax revenue," he stated.

Tax processing will be delayed, and HMRC will have to deal with laypeople or solicitors in cases where there isn't a qualified individual acting as an executor.

"All those things lead to issues.

During the hearing, some potential solutions were to reduce the interest rate on late IHT payments, extend the six-month deadline, and permit 50% of the pension to be kept while tax calculations are being made.

However, there is uncertainty as to whether the government will pay attention before April 2027.