- The Treasury's response to the House of Lords Economic Affairs Committee report 'Inheritance tax measures: unused pension funds and agricultural and business property reliefs' was published yesterday
- Although it accepted some of the Lords’ recommendations, the Treasury dismissed changes to IHT and pensions to create a statutory safe harbour from late payment interest in certain circumstances and to temporarily extend the deadline for payment of IHT on pension assets to 12 months
- The Treasury confirmed the government would consult on information sharing regulations in the next three months
- It also confirmed that final guidance for both industry and the general public, including lay personal representatives (PRs), will not be published until days before the new rules go live on 6 April 2027
- Also in its response, the Treasury defended its approach to tax policy making, including rejecting the need for a formal review
- A report by Oxford Economics, co-sponsored by AJ Bell, in July 2025 showed alternative solutions would have achieved the government’s policy aims and delivered the same fiscal objectives, whilst maintaining simplicity and delivering better outcomes for grieving families
Rachel Vahey, head of public policy at AJ Bell, comments:
“It’s disappointing that the government has dug its heels in and isn’t even willing to consider a change to the six-month deadline to pay IHT.
“Adding pensions to the IHT calculation is going to prove to be an administrative nightmare for personal representatives (PRs) – who are often family members appointed to work out what happens to someone’s estate when they die – at a time when they are at their most vulnerable.
“Extending the IHT payment deadline from six months to 12 months would help PRs immensely. Otherwise, it’s easy to see how many estates and beneficiaries are going to face late interest payments at an excruciatingly high rate of 4% above base rate level (currently 7.75%) when they miss deadlines due to administrative jams. The fact the government will allow PRs to put a temporary stop on paying out money from a pension for up to 15 months is tantamount to an admission they expect the two processes of winding up the estate and settling the pensions to be out of sync right from the start.
“But this should have been a permanent change for all IHT due, not a transitionary sticking plaster just for pension IHT. The six-month deadline was set in past centuries at a time when settling financial matters was generally a more straightforward process. As the number of people paying IHT continues to soar, the longer HMRC is taking to deal with the paperwork and issue IHT bills.
“AJ Bell and the wider pensions and financial advice industry have argued long and hard that there were far simpler and easier ways of achieving the policy and financial aims that would sidestep this distress. As we hurtle towards 6 April 2027, it will become more obvious the administrative distress this policy decision will cause.”
Tax-making policy
“The Lords’ sub-committee made several recommendations on the government’s approach to tax policy making, including that it should always hold formal public consultations. In response, the government has robustly defended its approach, pointing to its extensive consultation with industry last year when drafting the pensions and IHT legislation.
“However, although the government did consult widely with industry on the implementation of the policy, this was only after it had already made the key decision to extend IHT to pensions. It did not consult on whether it was the right measure to achieve the government’s aims.
“In contrast AJ Bell, together with others in the pensions industry, had long made the case for the Treasury to consider alternative approaches. A report by Oxford Economics, published in July 2025, concluded that the current proposal risked delivering poor outcomes for consumers, and that alternative proposals were available that would maintain simplicity, ensure beneficiaries receive funds in a timely manner, leverage existing processes between HMRC and beneficiaries, and protect customers in vulnerable circumstances.
“Importantly, the alternative proposals put forward by Oxford Economics would have delivered the same policy objectives and raised the same amount of tax revenue for government as the current shambles.
“The Lords also urged the government to launch a formal review of its approach to tax making policy after the next Budget. But despite speculation on pension tax changes reaching fever pitch in the run-up to the last two Autumn Budgets, persuading many to take hasty, and often irreversible, decisions to access their pensions early, the government has pushed back on any need for a formal review or to change the way it works.
“However, without a change in behaviour, the patterns we have seen over the last two years will only be repeated once again. Speculation will run wild, and government will probably do very little to dampen it or reassure pension savers, ultimately undermining confidence in pensions and the government’s aim to harness the power of retail investing for economic growth.”
The devastating impact of late payment interest
“HMRC charges interest on any tax paid late. In April 2025, the late payment interest was raised to 4% above the Bank of England base rate. Currently this rate is 7.75%, but it has been as high as 8.5% in the past 12 months.
“According to a Freedom of Information request by AJ Bell, the tax collectors had raked in £137 million in late payment interest on income tax in the 2023/24 tax year by February 2026, with the average interest payment sitting at £100.37.
“Late payment interest will also be due on any late payments of IHT, and PRs are responsible for paying any IHT due by the end of the sixth month after the month of death. So, it’s essential that PRs take steps to ensure that IHT is paid on time to stop late payment interest from building up.
“Taxpayers can get their fees and charges waived, but only if they meet a certain list of excuses from HMRC. Simply not knowing that you needed to pay IHT or not understanding how to are not enough. Only ‘reasonable excuses’ such as serious illness, bereavement or unforeseeable events, like computers not working, will pass muster.
“From April 2027, PRs will encounter additional challenges by having to include pensions in the estate when working out IHT due. They will be reliant on each pension scheme the deceased was a member of telling them the value of the pension, to allow the PRs to work out the IHT due on each scheme.
“They may then be able to ask the pension scheme to put a hold on 50% of payments being made to the beneficiaries. They could then direct the pension scheme to pay the IHT in respect of that pension, and the scheme has five weeks to do that. PRs will therefore need to be aware of these timescales and plan accordingly.”
