Could a change to the pension inheritance tax rule cause Sippholders to experience a liquidity crisis?

Certain self-invested personal pensions (Sipps) that own commercial property may face a liquidity crisis as a result of changes to the pension inheritance tax rule that take effect in April 2027

We show you what you can do to lessen the effects.

Tens of thousands of self-invested personal pension (Sipp) plans with property holdings may face an inheritance tax (IHT) nightmare when new regulations take effect next year.

Financial firm Bowmore Financial Planning cautions that loved ones might not have enough time to sell commercial property assets held in the more than 50,000 plans before a critical six-month HMRC deadline.

Chancellor Rachel Reeves stated in the 2024 Autumn Budget that unused pension funds, including those from Sipps, would be subject to IHT starting in April 2027.

On the other hand, beneficiaries of plans involving commercial property holdings might have to scramble to find money to pay IHT bills after the owner passes away.

According to data gathered from the Financial Conduct Authority (FCA) through a Freedom of Information request made by Bowmore, 54,387 Sipp plans currently own commercial property.

Offices, businesses, and retail spaces are all considered commercial real estate. Sipp owners have the option to invest in a commercial property fund, which uses an investment manager to buy and sell properties by pooling the capital of several investors.

Additionally, the funds in a Sipp can be used to purchase commercial real estate directly, and any rental income received from it is free from income tax.

Why Sipps' commercial real estate presents an IHT risk.

Due to its relative lack of liquidity, commercial real estate may be difficult to sell quickly unless the price is drastically reduced.

Within six months of a person's passing, IHT is typically due. However, Bowmore cautioned that starting in April 2027, beneficiaries might find it difficult to raise funds to pay the IHT bill quickly enough to meet this deadline.

If the six-month deadline is missed, payment arrangements can be made with HMRC; however, interest will be charged on any unpaid taxes.

According to Bowmore financial planner John Clamp: "The risk profile of owning commercial property inside a Sipp is significantly altered by the introduction of IHT on pensions.

"With the modifications to IHT regulations, families may find themselves attempting to raise a six-figure tax bill without the liquidity to do so because these assets were never intended to be accessed quickly. The "

"We continue to incentivize pension savings for their intended purpose of funding retirement instead of being openly used as a vehicle to transfer wealth," a Treasury spokesman stated. "After these and other changes, more than 90 percent of estates each year will continue to pay no inheritance tax." A "

What should business property owners in Sipp do?

A Whole of Life (WOL) insurance policy is one option, according to Clamp.

When a person passes away, these policies provide a guaranteed lump sum that beneficiaries can use to settle an IHT bill and avoid having to sell assets, such as commercial property.

One of these policies will cost you money, but it might end up being more economical than having to sell commercial property quickly.

Another is to spend more of your estate's value so that your beneficiaries won't need to sell any commercial property and your IHT bill will be lower.

Clamp said it's worth consulting a financial advisor because the regulations can be very complicated.