Rachel Reeves has been urged to give families more time to settle their inheritance tax (IHT) bills after warnings that a change in the law to include pensions, as well as how farms and businesses are included in estates, means the current timetable is “unworkable”.
There are limits on what can be passed on tax-free in an inheritance estate, which leads to some people planning ahead and giving away assets tax-free before they die.
Usually, any inheritance tax due has to be paid within six months, or longer if paying in instalments, but with the first payment made within the six months.
However, changes made by the chancellor have made it more complicated for some estates to be settled, while some pension providers can also take longer than six months to locate both the entire amounts for inclusion and their beneficiaries, the House of Lords Finance Bill committee has warned.
Lord Roger Liddle, chair of the committee, which is scrutinising the changes, told peers: “We think inheritance tax is going to become a significant problem for people who have just suffered a death and must now sort out the tax affairs of their loved one within six months, especially when this is applied to pensions.”
The committee has called for a one-year period for settling bills, while also asking for interest added to late payments to be waived when circumstances are out of a family’s control.
IHT bills that are not paid on time are subject to interest, in line with the Bank of England base rate – currently 3.75 per cent – plus four percentage points. Currently, that means HMRC would charge interest at 7.75 per cent, a rise which Ms Reeves oversaw in 2024.
Industry experts have added their voice in agreement, with the government urged to “learn the lessons” of previous errors and warned that future inclusion of pensions in IHT calculations makes current timelines “unworkable” as they “do not reflect operational realities”.
Jon Greer, head of retirement planning at Quilter, said that many estate executors will be dealing with bills for the first time, at a moment which is already stressful and emotional.
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“The Lords’ report rightly shines a light on a problem the government has so far underestimated,” he said. “Asking a family member or friend dealing with an estate for the first time, to identify, value and pay inheritance tax on pension assets within six months, frequently without having control over those assets or timely information from multiple scheme administrators, is a recipe for delay, confusion and unintended penalties.”
He said: “Executors who can demonstrate they have taken reasonable steps to comply should not be hit with interest charges simply because they are waiting on third parties to provide information or release funds. That would be deeply unfair and risks turning an already demanding role into a costly and stressful exercise.
“It is also crucial that the government learns the lessons from the chaotic implementation of the abolition of the lifetime allowance.
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“If it is determined to press ahead with bringing pensions into the inheritance tax net, it must ensure both the policy design and the industry infrastructure are genuinely ready. If that requires a delay, then so be it. It is far better to have all the ducks in a row than to push through half-baked policy on the fly, with families, executors and advisers left to pick up the pieces.”
Pensions are not currently part of an estate’s taxable amount. But from April 2027, they will be, counting towards a total of £325,000 of assets, which can be passed along tax-free.
Above that allowance, a 40 per cent tax is charged – though there are different factors which can limit this, such as leaving anything tax-free to a spouse or civil partner, or a main home going to a direct descendant to add another £175,000 tax-free allowance.
Mark Plewes, head of pensions at WBR Group, called for the 12-month limit to become permanent and criticised the current plans to include pensions in estates as “unworkable”.
He said: “The proposals already outlined by government risk creating an overly complex and burdensome system for pension scheme administrators and trustees, with little evidence they will deliver better outcomes for beneficiaries or HMRC. At a time when millions are already under‑saving for retirement, measures that could further disincentivise pension saving are deeply concerning. Pensions must remain a tool for long‑term financial security, not a tax trap.
“The proposed window for valuing pension assets is unworkable, particularly for schemes with discretionary death benefits or illiquid assets such as commercial property. These timelines simply do not reflect operational realities and we would urge the government to reconsider on this point.”
The Treasury has been contacted for comment.