A House of Lords committee report has warned that bringing pensions into the scope of inheritance tax (IHT) will cause ‘significant delays and costs’ under the currently proposed rules.
The House of Lords report looks at the Government’s proposed new rules that will bring pensions within the estate when working out IHT due from April 2027.
The report says the committee does not believe it is realistic to expect personal representatives to meet the proposed six-month deadline for payment of IHT in relation to pension assets. It recommends that a statutory safe harbour is set up to protect them from late payment interest.
Creating a statutory safe harbour would help protect personal representatives who can show that they took reasonable steps to pay the IHT due but were stymied by circumstances beyond their control from late payment interest.
The report also recommends the six-month IHT payment deadline to be extended to 12 months for IHT of pension assets for a transitional period.
HMRC charges interest on any tax paid late, including IHT. In April 2025, the late payment interest was raised to 4% above the Bank of England base rate. Currently this rate is 7.75%.
According to a Freedom of Information request by AJ Bell, the HMRC collected over £150m in late payment interest on income tax in the 2022-23 tax year by March 2025, with the average interest payment sitting at £103.33.
Rachel Vahey, head of public policy at AJ Bell, said an extension to the payment deadline for IHT needs to be permanent.
She said: “Extending the IHT payment deadline from six months to 12 months would also help immensely. But this needs to be a permanent change for all IHT due, not a transitionary sticking plaster.
“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.
“We are now saddled with this unwieldly legislation. HMRC has already listened to pleas and changed the rules to allow PRs to ask pension schemes to pay the IHT due on the pension. But more changes are needed if we are to spare grieving families administrative pain and distress.”
Jon Greer, head of retirement planning at Quilter, said the Government needs to learn lessons from is 'chaotic implementation of the abolition of the lifetime allowance.
He said: "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."