Three inheritance tax reliefs to be removed under Andy Burnham and John Healey

The Labour Party administration, led by Prime Minister Andy Burnham and Chancellor John Healey, is set to introduce new inheritance tax (IHT) rules that experts warn could unfairly disadvantage pensions. These changes, originally announced by the previous Labour leadership, will come into effect from April 2027.

Under the new legislation, unused pension funds will be liable to inheritance tax alongside their existing exposure to income tax when withdrawn. However, concerns have been raised by financial services provider AJ Bell about the potential introduction of a two-tier taxation system.

This system could result in pensions being excluded from important inheritance tax reliefs that are available to other types of assets. Such reliefs include loss on sale relief, business property relief, agricultural property relief, and the ability to pay inheritance tax in instalments on qualifying assets.

AJ Bell’s Rachel Vahey explained that three specific rules will change, meaning these reliefs will no longer apply to assets held within pensions. She outlined each relief and its impact:

Loss on sale relief: This allows executors to reclaim some inheritance tax if certain assets are sold for less than their value at the time of death. For instance, if shares are valued at a certain price upon death but later sold for less, the estate may use the lower sale price to claim an IHT refund.
Instalment payments for inheritance tax: Currently, for particular assets like commercial property, HMRC permits executors to pay inheritance tax in up to ten equal yearly instalments. This provides flexibility and helps estates avoid the forced sale of illiquid assets, although interest is charged on outstanding balances. However, if such assets are held within a pension, this option will be removed.

Vahey warned that without these reliefs, executors may be compelled to sell pension-held assets quickly to settle IHT liabilities, potentially at a financial disadvantage to the estate.

These forthcoming changes signal a substantial shift in the treatment of pensions under inheritance tax law, prompting calls for further review to ensure fairness across different asset types within estates.