Families could face unexpected inheritance tax (IHT) bills years after an estate has been finalised due to changes pursued by the Labour Party government under Andy Burnham and John Healey, continuing policies initially introduced by former Chancellor Rachel Reeves.
From 2027, pensions will become liable for inheritance tax, but experts warn that the official HM Treasury documentation outlining the changes contains several practical flaws. Notably, it does not adequately address “lost” or “forgotten” pensions that may only come to light after an estate has been wound up.
Currently, the inheritance tax rules allow a nil-rate band of £325,000, meaning estates up to this value are exempt from IHT. From April 2027, this nil-rate band will need to be apportioned by estate administrators between estate assets and pension funds in order to calculate the IHT due on each retirement pot.
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If a pension is discovered following the closure of an estate, HM Revenue and Customs (HMRC) would be required to revisit these calculations, potentially requiring families to pay additional tax years after the estate was considered finalised.
Nimesh Shah, an expert from accountancy firm Blick Rothenberg, emphasised the importance of certainty during the probate and IHT process, stating: “One of the fundamental aims of the probate and IHT process should be to provide finality. But the proposed approach creates uncertainty for families and makes estate administration more difficult, and indefinitely open-ended.”
Adam Cole of wealth management firm Quilter advised keeping clear records and consolidating pension pots to assist families in managing retirement assets, saying: “This is another reminder of the value of keeping clear records of pension arrangements and, where appropriate, consolidating pots during retirement planning to make them easier for families to identify and administer.”
Ruth Sadlier of the Chartered Institute of Taxation highlighted the potential unfairness for beneficiaries, commenting: “The alternative is that you leave uncertainty for every other beneficiary. Is it fair to them if they’re told five years later that an amount of money they’ve already spent needs to be clawed back? By taxing the newly discovered pension at a flat rate, without the need for recalculations, the pension beneficiary also receives their money quicker.”