Families in the UK could face a “double tax” hit on pensions and a strict six-month deadline to settle Inheritance Tax (IHT) bills under new rules due to come into force in April 2027, wealth managers have warned. The changes will bring unused pension pots into the scope of IHT for the first time, significantly altering how retirement savings are passed on.
Pension Pots To Be Included In Inheritance Tax System
Under the new framework, unused pension funds will be treated as part of a deceased person’s estate for Inheritance Tax purposes, ending long-standing tax advantages that allowed pensions to pass outside the IHT system.
The change means beneficiaries could face both Income Tax and Inheritance Tax liabilities, depending on how withdrawals are handled and when the pension is accessed.
Families Must Decide How To Pay Tax Bills
Executors and beneficiaries will be required to choose whether pension providers should pay a proportional share of the IHT bill directly from the pension pot (where liabilities exceed £1,000), or whether the tax should be covered from other estate assets.
Once instructed, pension providers must transfer payments to HMRC within 35 days of notification, adding pressure to already complex estate administration processes.
Six-Month Deadline To Settle Full Tax Liability
Estates will have just six months from the date of death to pay the full Inheritance Tax bill on all assets. After this period, interest charges will begin to apply.
This deadline may create additional pressure for families dealing with multiple pension providers or assets that are difficult to value or liquidate quickly, such as property held within pension structures.
Experts Warn Of Administrative Complexity And Financial Risk
Wealth advisers have warned that the new rules will significantly increase the administrative burden on grieving families, particularly where multiple pension pots are involved.
Industry specialists say the combination of different tax treatments and tight deadlines could lead some beneficiaries to make rushed decisions that may not be financially optimal in the long term.
Concerns Over Higher Tax Burden On Estates
For individuals who die after age 75, pension withdrawals taken by beneficiaries may already be subject to Income Tax at rates of up to 45%, depending on their tax band.
The addition of Inheritance Tax on unused pension savings could therefore create what advisers describe as a “layered tax burden”, particularly affecting larger estates.
Estate Planning Strategies Already Changing
The announcement has prompted many higher-net-worth individuals to review their financial planning strategies, with increased interest in methods such as phased withdrawals, gifting strategies, life insurance in trust, and charitable giving.
According to wealth management research, a significant proportion of savers are now actively considering ways to reduce potential exposure to the new rules before they take effect.
Major Shift In Pension Tax Treatment
The reforms represent a significant change in how pensions are treated in estate planning, ending decades of preferential tax treatment designed to encourage long-term retirement saving.
With implementation still ahead, advisers expect further guidance as families and financial planners adjust to the new inheritance tax framework.
