Labour’s proposed inheritance tax (IHT) changes on pensions, which could raise an estimated £40 billion for the Treasury over the next 20 years, are facing growing concerns about feasibility and implementation delays.
The reforms, aimed at increasing tax revenues from inherited pensions, have sparked debate among financial experts and policymakers.
According to GB News, concerns are mounting over whether the government can realistically implement these changes within the proposed timeframe. Experts warn that the timeline may be unrealistic, urging individuals to be cautious before making changes to their financial plans.
Proposed Inheritance Tax Changes and Their Impact
Under the current rules, unused pensions can be passed on tax-free, making them an efficient tool for wealth transfer. However, Labour’s proposed reforms would see pension savings above the £325,000 IHT threshold taxed as part of an individual’s estate. The changes are set to take effect from April 2027.
In addition to pension taxation, IHT rules on business and agricultural assets are also due for modification, with a new £1 million allowance coming into effect from 6 April 2026.
Currently, the inheritance tax rate remains at 40%, applying to estates exceeding the threshold. The £325,000 tax-free allowance and the £175,000 residence nil-rate band for estates valued under £2 million are frozen until April 2030.
If enacted, these changes could lead to higher tax bills for beneficiaries and alter how retirees manage their pension funds, shifting their use towards income rather than legacy planning.
Concerns Over Implementation Delays
Despite Labour’s commitment to the reforms, financial experts have cast doubt on whether they can be introduced within the proposed timeline. Steve Bish, founder of S Bish Estate Planning, expressed scepticism about the likelihood of the government meeting its target date.
Personally, I’ll be surprised if the government implements these changes in the timescale they’ve given. Writing and passing legislation is a technical and time-consuming process, so I expect them to push back the date from the proposed April 2027.
With no draft legislation yet published and key details still unclear, critics argue that the complexity of the overhaul may lead to significant delays.
Calls for Caution Amid Free Wills Month
As discussions around inheritance tax reforms continue, Bish advises individuals against making premature adjustments to their estate plans.
With the Government announcing changes to inheritance tax, it’s natural that many people are wondering whether they need to rewrite their Will. But right now I’m advising my clients to ‘do nothing’.
With Free Wills Month underway, legal and financial experts are encouraging Britons to stay informed but wait for official confirmation before making any substantial financial changes.
Existing Inheritance Tax Rules Remain Unchanged
While potential IHT reforms are debated, key elements of the tax system remain unchanged. The spousal exemption continues to allow married couples and civil partners to transfer assets tax-free upon the first death.
Additionally, the £325,000 tax-free allowance and the £175,000 residence nil-rate band for estates valued under £2 million are frozen until April 2030, maintaining current thresholds.
Beyond these limits, the inheritance tax rate remains at 40%, ensuring that estates exceeding these allowances are subject to taxation at the existing rate.
Tax-Efficient Estate Planning Strategies
Despite potential changes, Bish reassures individuals that they can still use existing IHT rules to minimise their tax liability through several strategies. Lifetime gifting remains a viable option, allowing individuals to reduce the taxable value of their estate by transferring assets, though certain limits apply.
Another approach is charitable donations, which can lower the inheritance tax rate from 40% to 36% if at least 10% of the estate is donated to charity.
Additionally, the spousal exemption enables married couples and civil partners to transfer assets freely upon the first death, ensuring that wealth remains within the family without immediate taxation.
Uncertainty Over Pension Taxation and Financial Planning
The proposed pension tax changes have raised concerns about their impact on retirees and beneficiaries. If implemented, these reforms could discourage using pensions as a wealth transfer tool and instead lead to more pension withdrawals during retirement.
If these changes do go ahead as planned, we’ll likely see pensions being used more for retirement income rather than as a wealth transfer tool, – Bish noted.
With the government advancing its proposed tax reforms, experts emphasise the need for individuals to seek professional advice to navigate the shifting landscape of inheritance planning effectively.
