- Personal representatives (PRs) face “significant delays and costs” as a result of government proposals to bring unspent pensions into inheritance tax (IHT) from April 2027, a new House of Lords committee report warns
- The report says it is not realistic to expect PRs to meet the six-month deadline for payment of IHT in relation to pension assets, as well as recommending a statutory safe harbour from late payment interest
- It also recommends the six-month IHT payment deadline after which PRs are hit with punitive interest rates be extended to 12 months for IHT on pension assets for a transitional period
- From April 2027, pensions will be included within the estate when working out IHT due
- AJ Bell has long been opposed to the new rules on the grounds they are unworkable and risk creating unnecessary delays, significant costs and distress for bereaved families – conclusions supported by the Lords’ report
- An economic research report by Oxford Economics and co-sponsored by AJ Bell in July 2025 showed alternative solutions would achieve the government’s policy aims and deliver the same fiscal objectives, whilst maintaining simplicity and delivering better outcomes for grieving families
Rachel Vahey, head of public policy at AJ Bell, comments:
“The House of Lords sub-committee has hit the nail on the head. These new rules will prove to be an administrative nightmare for Personal Representatives (PRs) – 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.
“AJ Bell and the wider pensions and financial advice industry argued long and hard that there were far simpler and easier ways of achieving the policy and financial aims that would sidestep this distress. But, as the House of Lords report points out, the government failed to listen to concerns of stakeholders early on, with the result that they are now tweaking rules late in the day to help ease the administrative burden.
“HMRC should be listening to the House of Lords’ recommendations to improve the new rules.
“By creating a statutory safe harbour, those PRs who can show that they took reasonable steps to pay the IHT due but were stymied by circumstances beyond their control should be protected from late payment interest. There could be a myriad of reasons why PRs fail in their task, from lack of prompt information from pension schemes through to the challenges posed where a large proportion of the pension fund is held in illiquid assets such as commercial property.
“Extending the IHT payment deadline from six months to 12 months would also help immensely. But this needs to be a permanent change for all IHT due, not a transitionary sticking plaster. 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.
“We are now saddled with this unwieldly legislation. HMRC has already listened to pleas and changed the rules to allow PRs to ask pension schemes to pay the IHT due on the pension. But more changes are needed if we are to spare grieving families administrative pain and distress.”
The devastating impact of late payment interest
“HMRC charges interest on any tax paid late. In April 2025, the late payment interest was raised to 4% above the Bank of England base rate. Currently this rate is 7.75%, but it has been as high as 8.5% in the past 12 months.
“According to a Freedom of Information request by AJ Bell, the tax collectors had raked in over £150 million in late payment interest on income tax in the 2022-23 tax year by March 2025, with the average interest payment sitting at £103.33.
“Late payment interest will also be due on any late payments of IHT. PRs are responsible for paying any IHT due by the end of the sixth month after the month of death. So, it’s essential that PRs take steps to ensure that IHT is paid on time to stop interest from building up.
“Taxpayers can get their fees and charges waived, but only if they meet a certain list of excuses from HMRC. Simply not knowing that you needed to pay IHT or not understanding how to are not enough. Only ‘reasonable excuses’ such as serious illness, bereavement or unforeseeable events, like computers not working, will pass muster.
“From April 2027, PRs will encounter additional challenges by having to include pensions in the estate when working out IHT due. They will be reliant on each pension scheme the deceased was a member of telling them the value of the pension, to allow the PRs to work out the IHT due on each scheme.
“They may then be able to direct the pension scheme to pay the IHT in respect of that pension, and the scheme has five weeks to do that. PRs will therefore need to be aware of these timescales and plan accordingly.”
Background:
Unused pensions are due to be included in calculations for IHT from April 2027. PRs will be liable for IHT due on pensions, and responsible for calculating and paying it.
Earlier proposals allowed only the pension beneficiary to instruct the scheme to pay IHT directly from pension funds, raising concerns that PRs might struggle to ensure the IHT bill is settled.
A change in the process announced in the Autumn Budget means PRs will be able to intervene to ask the pension scheme to retain half the pension fund – not paying it out to the pension beneficiary for up to 15 months – and pay the IHT due in certain circumstances. This should make it easier for PRs to ensure the IHT bill is settled in full, without having to rely on estate funds to pay the IHT due on the pension.
Better alternatives were available
In July 2025, Oxford Economics published a report, co-sponsored by AJ Bell, which examined alternative approaches to the proposal to include pensions in IHT calculations. The report concluded that the current proposal risked delivering poor outcomes for consumers, and that alternative proposals were available that would maintain simplicity, ensure beneficiaries receive funds in a timely manner, leverage existing processes between HMRC and beneficiaries, and protect customers in vulnerable circumstances.
Importantly, they would deliver the same policy objectives and raise the same amount of tax revenue for government.
The two alternative proposals were:
- All death benefits would be subject to income tax and could only be taken as income if paid to a dependant.
- A standalone flat rate ‘inheritable pension tax charge’ would be paid on all unused pension funds and defined benefit lump sum death benefits above a threshold.
