From April 2027, pension assets will become liable for inheritance tax in a blow to retirement savers
Pension savings will be "unfairly penalised" under changes to inheritance tax (IHT) rules that are due to come into effect from next year, analysts warn.
Financial services firm AJ Bell has cautioned that April 2027's IHT changes threaten to establish a discriminatory regime that treats pension assets less favourably than other forms of wealth.
The company warned that HM Revenue and Customs' (HMRC) planned approach would effectively operate a "two-tier" system, denying pension holders access to key tax reliefs that remain available on assets held outside of pensions.
Under the forthcoming rules, the vast majority of unused pension pots and death benefits will be drawn into an individual's estate for IHT calculations, a significant shift that AJ Bell argues will leave families facing unjustifiably higher tax burdens.
Specifically, the reliefs being withheld from pension assets include loss on sale relief, business relief, agricultural relief, and the option to settle IHT on property through instalments.
HMRC has justified this exclusion on the basis that pension scheme members are not regarded as the legal owners of their pension assets, meaning such reliefs cannot apply.
AJ Bell has challenged this reasoning, arguing that it contains a fundamental contradiction.
The firm contends that by pulling pension funds into a saver's estate for IHT purposes, HMRC is effectively treating those assets as belonging to the individual, while simultaneously denying reliefs on the grounds that they do not.
AJ Bell has highlighted that pension wealth risks being taxed first as part of the deceased's estate for IHT purposes, and then a second time as income when received by the beneficiary.
This double charge applies in cases where the pension saver dies at age 75 or older, meaning beneficiaries would face an income tax liability on withdrawals from the inherited pension on top of the IHT already levied against the estate.
The firm argues this amounts to an inherent penalty on pension savings that does not apply to other inherited assets.
Rachel Vahey, AJ Bell's head of public policy, said: "HMRC's justification is hard to square
"It says these reliefs should not apply because the pension saver does not own the pension assets, yet those same assets are being pulled into the saver's estate for IHT purposes."
She added: "The result is an unfair and unnecessarily complex system. Families could lose access to loss on sale relief, business property and agricultural property relief and the option to pay IHT in instalments on certain assets, solely because they are held within a pension."
Ms Vahey urged the Government to "go back to the drawing board and look at simpler options for taxing pensions on death," or at minimum ensure pensions receive equivalent treatment to other assets within the IHT framework.
