The Lords Finance Bill Sub-Committee is calling for evidence on the proposed implementation of inheritance tax on pensions. The sub-committee wants to hear from taxpayers, their advisers and any other interested parties. Written evidence can be sent until 5pm on 7 October.  

The sub-committee, appointed by the Economic Affairs Committee to consider the draft finance bill 2025-26, will look at 

The peers will not look at the rates of tax proposed by the government but make recommendations on how the government’s tax policy can best be implemented and administered, explained Lord Liddle, who chairs the sub-committee.  

"These are important changes. To inform our work we want to hear from as broad a range of people and organisations as possible. If you have a view on any aspect of these proposals, please let us know what you think,” he added.  

Among others, the peers are interested to learn how challenging it will be for personal representatives to identify and report inheritance tax due on pension assets and death benefits, and how personal representatives will be able to recover amounts for IHT from pension beneficiaries.  

It also asks if the government should do more to raise awareness ahead of April 2027, and whether transitional provisions need to be put in place. 

The proposal to apply IHT to unused pension pots and death benefits was made at the last Autumn Budget. The government estimates that, of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 additional estates will have an inheritance tax liability because of the new measure, while about 38,500 will have a higher IHT bill than they would otherwise have. In total, the Treasury expects to raise £3.44bn by 2029-30.  

Following a consultation, HMRC published draft legislation for the measure in July this year, confirming that it plans to go ahead with new rules for deaths occurring from 6 April 2027. 

Compared with HMRC’s initial consultation, the draft legislation shifts the burden of paying IHT from pensions administrators to the personal representatives of a deceased. This is after the pensions industry pointed out that scheme administrators cannot know what other assets someone had and would therefore frequently or always pay the maximum IHT possible to avoid non-compliance, with a knock-on effect on beneficiaries.  

The new proposals that move the liability for calculating and paying IHT on pensions to personal representatives will still create complexity and confusion, says AJ Bell.

  

“Despite a deluge of criticism of their original proposals, the government stubbornly decided to press ahead, changing the detail to push the responsibility of calculating and paying IHT firmly on the shoulders of personal representatives. But it quickly became apparent the new proposals didn’t resolve any of the complexity; instead, they merely create new problems for bereaved families,” said head of public policy at the investment platform, Rachel Vahey. 

  

The fact an IHT bill has to be settled within six months could put immense pressure on bereaved families, she said, as many people have complex financial affairs, especially those who die unexpectedly. 

  

“But it’s not too late. Ministers still have time to see that these proposals are not the best way to achieve their objectives. There are alternative solutions to taxing pensions on death that won’t cause the administrative frustration, delays in payment and concerns for bereaved families that the current set of proposals threaten to, while still raising the same amount for government coffers,” she claimed. 

 

Vahey also argued that IHT on pensions amounts to double taxation as pension fund withdrawals are subject to income tax.   

  

“The double taxation proposed means that pension assets will be subject to a 64% effective tax rate on death where the pension pot exceeds the IHT nil rate band allocated to the pension and the beneficiary is a higher rate taxpayer, rising to as much as 90% or more where the residence nil rate band is tapered away entirely,” she said.  

Pension payments are taxed at people’s marginal rate, but contributions are tax-relieved under the UK’s ‘exempt, exempt, taxed’ system.