The Treasury has declined to extend the current six-month deadline for the payment of inheritance tax (IHT) on pension assets. This deadline begins on the last day of the month in which a person passes away.
Maintained for many years, the measure is intended to ensure tax collection is prompt and efficient. Officials announced on Monday that no alterations would be made, despite representations highlighting the potential difficulties for families.
Representatives stated that maintaining the deadline ensures the government collects tax in a “quick and efficient” manner and helps prevent long delays in finalising tax affairs.
House of Lords’ Recommendation Dismissed
Earlier recommendations from the House of Lords suggested families should have up to one year to settle inheritance tax on pension pots.
The Lords’ report, published in January, argued that the six-month timeframe is often incompatible with the time required to access and value pension assets.
The report warned the deadline may be “impossible” to meet in numerous cases given the complexities of modern pension arrangements. However, the government has opted to uphold the unchanged timeframe, despite these concerns.
Challenges for Bereaved Families
From April 2027, any unused pension funds will count towards an estate for inheritance tax purposes, applying the 40% rate to assets above tax-free allowances.
Currently, the threshold stands at £325,000 plus a separate £175,000 for the main residence when left to direct descendants. Bereaved families, often already facing challenging circumstances, may struggle to locate all pension funds and accurately calculate tax liabilities within the deadline.
If the inheritance tax is not paid within six months, interest set at 4 percentage points above the Bank of England base rate will be added to the outstanding sum. Late payment penalties can reach as high as 7.75% in some circumstances.
Inheritance Tax Process Explained
Administrators or executors must collate all assets, including pension pots, calculate any inheritance tax due, and pay it to HMRC within the prescribed timeframe.
The nil-rate band allows estates up to £325,000 to avoid inheritance tax, while the residence nil-rate band provides a further £175,000 for property passed directly to descendants. Any value above these allowances is taxed at 40%.
The six-month period, established when financial affairs were generally more straightforward, has been criticised as outdated given the increasing complexity of modern estates. The inclusion of pension pots is expected to make the administrative burden even greater, particularly for non-professional executors.
Warnings on Double Taxation Risks
Financial experts have cautioned that beneficiaries may in some cases face double taxation on inherited pensions. If the pension holder dies before age 75, beneficiaries can typically receive pension funds free of income tax.
If death occurs after 75, withdrawals from inherited pension pots remain subject to income tax at the recipient’s marginal rate, which may be 20%, 40%, or 45%.
When pension pots are added to inheritance tax calculations, high-value estates could incur an effective tax charge of over 67% for those in the highest income tax bracket. In some situations, due to tapering of the residence nil-rate band on estates above £2 million, the effective rate could rise to around 70.5%.
Reactions from Financial Experts
Financial professionals and industry commentators have expressed their disappointment at the decision to leave the deadline unchanged. Rachel Vahey, head of public policy at AJ Bell, said: “It is disappointing the government is not willing to reconsider the six-month timeline.
Including pensions in IHT calculations will create significant challenges, especially for grieving families, and the deadline was set in an era when estates were far less complex.”
Experts have warned that the changes could discourage individuals from acting as executors, given the risk of being liable for tax on assets they cannot easily access or value within the short time allowed. Calls for policy reform have been widespread within the financial advice sector.
Final Summary
The government’s refusal to extend the inheritance tax deadline for pensions means thousands more families could face tight time pressures when settling estates, starting April 2027.
The unchanged six-month window poses administrative burdens for bereaved relatives, who must value and report pension pots amid personal loss. Concerns over double taxation and potential deterrents for family members taking on executor roles remain unresolved.
As inheritance tax thresholds and rules continue to evolve, financial experts advise early estate planning and professional advice. Families navigating complex obligations have access to tools and guidance, including services such as the Pie app, to help clarify inheritance tax responsibilities.
