Pension/IHT changes could trigger ‘double tax’ and tighter deadlines for families

Families inheriting pensions could face significantly higher tax bills and greater administrative pressure under new government rules that will bring unspent pension funds into the scope of inheritance tax (IHT) from April 2027, Saltus has warned.

The changes mean some beneficiaries could face both IHT and income tax on inherited pension assets, increasing complexity around estate planning and pension wealth transfers.

Under the new framework, estates will first calculate total IHT liability before beneficiaries decide whether pension providers should pay a proportional share directly to HMRC or whether the tax should be settled from other estate assets.

Where pension providers are instructed to contribute £1,000 or more, payment must be made to HMRC within 35 days of notification.

The impact may be particularly significant where the pension holder dies after age 75, as beneficiaries withdrawing inherited pension funds could also face income tax at their marginal rate.

Saltus chartered financial planner, Henrietta Grimston, said: “If the estate holder passed away after the age of 75, any lump sums or withdrawals from the unspent pension taken by the beneficiaries will be taxed at their marginal rate of income tax.

"As higher and additional rate income taxpayers would be taxed at 40 per cent and 45 per cent respectively, instructing the pension provider to pay a portion of the IHT bill may reduce their overall liability.”

There are also operational challenges created by the new six-month deadline to settle IHT across an estate before late payment interest begins to accrue, according to Saltus, which could prove difficult where families must identify multiple pension arrangements or where pensions contain illiquid assets such as property.

The firm said the reforms are already influencing estate planning decisions, including high net worth individuals (HNWIs).

Its latest Wealth Index survey of 2,000 UK adults with at least £250,000 in investable assets found 21 per cent are concerned about the impact on passing on pension wealth, while 26 per cent are considering strategies to protect pensions from IHT.

Saltus added that options such as phased tax-free withdrawals, gifting surplus income, using life insurance trusts and charitable giving may help reduce future liabilities, but warned that decisions should be based on a full assessment of beneficiaries’ tax positions and wider estate assets.

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