The distinction has prompted concerns that pension assets could face different treatment from other parts of an estate. According to the Birmingham Mail, AJ Bell has warned that the plans could create a two-tier inheritance tax system because three existing forms of relief will not be available to assets held within pensions.
Three Forms of Inheritance Tax Relief Will Be Unavailable
From April 2027, unused pension funds will fall within the inheritance tax system, alongside the existing possibility that beneficiaries may face income tax when money is withdrawn. The change means pension assets will be considered for inheritance tax purposes after the holder dies.
AJ Bell says the main issue is not simply that unused pensions will be brought into the inheritance tax framework, but that some of the reliefs applying to other assets will not follow them into that system.
According to Rachel Vahey of AJ Bell, the three affected areas are loss on sale relief, business property and agricultural property relief, and the ability to pay inheritance tax by instalments on certain assets.
Loss on sale relief can apply when executors sell qualifying assets for less than their value at the date of death. Vahey explained that, for example, shares might be valued at one amount when a person dies but later sold for a lower price.
In those circumstances, an estate may be able to use the lower sale value instead and recover some of the inheritance tax already paid. Under the pension rules described by AJ Bell, that relief would not be available solely because the relevant asset was held within a pension.
The same distinction applies to business property relief and agricultural property relief. According to the Birmingham Mail, households could lose access to those forms of relief when qualifying assets are contained within pension arrangements rather than held elsewhere in an estate.
Pension Assets Will Also Lose Access to Instalment Payments
A separate concern involves the way inheritance tax bills can be paid when an estate includes certain assets that may not be easy to sell quickly.
HMRC currently permits executors to pay inheritance tax on some assets, including commercial property, through as many as ten equal annual instalments. This arrangement can allow an estate to meet its tax obligations without immediately selling an illiquid asset, although late-payment interest is normally charged on the outstanding amount.
Vahey said that this option would not be available when commercial property is held inside a pension. In that situation, the executor could instead face pressure to arrange a rapid sale in order to settle the inheritance tax liability.
AJ Bell argues that the effect is a difference in treatment based on where an asset is held. An asset owned directly by an estate may qualify for relief or a more flexible payment arrangement, while the same type of asset held within a pension may not.
The changes are scheduled to take effect from April 2027. As reported by the Birmingham Mail, AJ Bell’s concern is that bringing pensions into inheritance tax without extending these three forms of relief could leave pension assets subject to a separate set of rules from comparable assets held outside them.
