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From April 2027, pension assets will become liable for inheritance tax
HM Revenue and Customs (HMRC) is being criticised over the "two-tier" inheritance tax regime as pension savings are set to miss out vital relief.
The tax authority has now published further details on how this new pension IHT regime will operate, with financial firm AJ Bell suggesting it will lead to a "two-tier" system.
While other inherited assets will be entitled to some tax relief, pension assets will not qualify for the same protection.
Financial analysts note this means estates face the prospect of larger tax bills, additional late payment interest charges, and reduced flexibility, all at a time when families are already coping with bereavement.
A particularly concerning aspect of the proposals is the potential for pension wealth to be taxed twice.
Where a saver dies at age 75 or older, their pension will first be counted as part of the estate for IHT purposes, and then taxed again as income when the beneficiary draws down the funds.
For those inheriting who pay tax at the higher rate, this dual charge could push the effective tax burden on inherited pension assets as high as 64 per cent.
This stands in stark contrast to the treatment of other inherited assets, which are not subject to the same compounding effect.
The result is a system that penalises families whose loved ones chose to keep savings within a pension wrapper rather than holding them elsewhere.
Among the reliefs being withheld from pension-held assets is loss on sale relief, which allows executors to reclaim some IHT if assets are later sold below their value at the date of death.
Rachel Vahey, head of public policy at AJ Bell, explained the disparity: "If shares are valued at one price on the date of death but later sold for less, the estate may be able to use the lower sale price instead and get an IHT refund."
Yet this mechanism will not extend to investments sitting inside a pension, even though it does apply to qualifying holdings within an ISA wrapper.
The distinction means two identical portfolios could receive fundamentally different tax treatment purely because of the account in which they are held.
Business property relief and agricultural property relief, which can reduce the taxable value of farmland or business assets by as much as 100 per cent up to £2.5million and 50 per cent beyond that threshold, will similarly be unavailable for pension-held assets.
Ms Vahey added: "This valuable relief won't apply to any farmland or businesses held in pensions, resulting in some executors facing higher IHT bills, and possibly considering moving such assets out of pensions before death."
The ability to pay IHT in instalments , spread across up to ten annual payments on assets such as commercial property, Will also be denied where those assets sit within a pension.
Ms Vahey noted that without this flexibility, executors may be forced into rapid sales: "The executor could be looking for a quick sale so they can settle their IHT bill as speedily as possible."
