Bereaved families will be required to meet existing deadlines to pay inheritance tax on unspent pension pots after the Treasury confirmed it will not extend the current six-month payment window.
The decision follows a House of Lords committee’s call for a longer period due to concerns about the administrative challenges facing executors.
Despite warnings that the new rules, taking effect from April 2027, could place additional strain on families, the Treasury said it would preserve the deadline to ensure efficient tax collection.
Inheritance Tax Changes for Pension Pots
From April 2027, inherited pension savings that remain unspent at the time of a policyholder’s death will become subject to inheritance tax, consistent with other taxable assets.
Under the revised system, these pensions may be taxed at a rate of up to 40 percent, as announced by Chancellor Rachel Reeves in the October 2024 Budget.
This policy marks a significant shift in the treatment of pensions for inheritance tax purposes and is expected to affect a broad range of estates.
Calls for Deadline Extension by Lawmakers
Earlier this year, a House of Lords committee recommended granting executors twelve months to settle inheritance tax liabilities on pensions before interest accrues, rather than the current six months.
Lawmakers argued that the added complexity of evaluating pension assets and securing the necessary information from multiple providers necessitates a longer window.
The committee underscored the administrative burden and potential for financial hardship among bereaved families managing complex estates.
Treasury’s Rationale for Retaining the Deadline
In correspondence published this week, the Treasury rejected calls for an extension. Officials stated that retaining “existing, longstanding deadlines ensures tax is collected quickly and efficiently.”
The department highlighted the importance of maintaining established processes to avoid delayed tax receipts and administrative complications within the tax system.
Industry Responses and Concerns
Several industry experts and former officials voiced concerns over the decision. Sir Steve Webb, former pensions minister and now partner at Lane Clark & Peacock, said the inclusion of pensions in inheritance tax would “undoubtedly slow things down for bereaved families.”
He maintained that even a minor extension to the payment period could help families navigate the process and reduce stress.
Rachel Vahey, head of public policy at investment platform AJ Bell, questioned the modern relevance of a deadline imposed “in past centuries when settling estates was more straightforward,” predicting increasing distress for families as the implementation date approaches.
Support Measures for Executors
The Treasury acknowledged that some executors may face challenges in meeting the deadline and pointed out existing support options.
Officials confirmed that pension providers will have new deadlines to deliver necessary information to executors.
Personal representatives will also be permitted to instruct pension schemes to pay inheritance tax liabilities directly from pension funds. Furthermore, executors may arrange for up to half of an inherited pension to be retained for a period of up to 15 months to cover potential tax bills.
Final Summary
The Treasury’s refusal to extend the six-month deadline for inheritance tax on pensions has attracted criticism from industry professionals and politicians concerned about the administrative burden on families.
Support measures have been introduced to facilitate compliance, including enhanced information requirements for pension providers and payment flexibility for executors.
While the intention remains to secure timely tax collection, the policy continues to prompt debate about its practical implications. For further guidance on managing inheritance tax and navigating the latest fiscal changes, the Pie app offers updated resources and tools.
