HMRC confirms pension inheritance tax change as families warned of unexpected bills 'years' later

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Families have less than eight months to prepare before unused pension pots are brought within the inheritance tax net

Families could be hit with unexpected inheritance tax bills years after an estate has been settled, experts have warned, as HMRC confirms how pensions will be treated under sweeping changes taking effect from April 2027.

The warning comes alongside the latest HMRC tax receipts data, which shows inheritance tax revenues climbing to £3.2billion for the period from April to July, up £0.1billion on the same window last year.

With fewer than eight months until unused pension pots are brought within the scope of inheritance tax, financial planners are urging families to act now.

Frozen thresholds, rising property values and growing asset wealth are already dragging more estates into the inheritance tax net, often without families being aware.

The forthcoming pension changes add a further layer of complexity that could catch beneficiaries off guard long after they believed financial matters had been resolved.

Nick Henshaw, Head of Intermediaries Distribution at Wesleyan, said HMRC has now provided clarity on certain aspects of the upcoming rules, but significant concerns remain.

"HMRC has now clarified some aspects of the changes. Under current plans, pension assets won't benefit from the same reliefs available to other estate assets, potentially adding another layer of complexity for families and those administering estates," Mr Henshaw said.

He highlighted a particular risk around pension pots that come to light only after an estate has already been distributed.

"There is also the risk of pension pots being discovered after an estate has been settled. In those circumstances, the inheritance tax position across the estate may need to be revisited, potentially leaving beneficiaries facing an unexpected bill years after an inheritance has been distributed," Mr Henshaw said.

Unlike other assets held within an estate, pensions will not qualify for the same reliefs, creating an additional burden for those managing the process.

Shaun Moore, a tax and financial planning expert at Quilter, said the government would be encouraged by the continued upward trajectory in tax revenues.

"PAYE income tax and national insurance contributions for April to July came in at £173.2 billion, which is £12.5 billion more than the same period last year," Mr Moore said.

He pointed to the ongoing freeze on income tax thresholds as a key driver behind the surge, noting that rising wages are pulling more people into paying income tax for the first time while pushing others into higher bands.

"For the Treasury, it is an effective way of boosting revenues without announcing headline tax rises, but for taxpayers it often means paying more tax without feeling any better off," Mr Moore said.

He described what began as a temporary measure as now one of the most reliable revenue streams for the public finances.

On inheritance tax specifically, Mr Moore noted that while receipts can vary month to month, the broader direction of travel is clearly upward.

"With the budget drawing near, wealth taxes are likely to attract increasing attention as the government looks at how best to balance the books," Mr Moore said.

He urged families to concentrate on what is already confirmed rather than speculating about future changes.

"With pensions set to become subject to inheritance tax from April 2027, now is a sensible time to review estate planning arrangements and ensure they remain appropriate," Mr Moore said.

Mr Henshaw echoed that advice, stressing the importance of getting affairs in order well before the April deadline.

"Keeping an up-to-date record of all pension arrangements and regularly reviewing estate plans can make it easier for families to understand what they are dealing with and reduce the risk of unwelcome surprises down the line," Mr Henshaw said.