Warning for UK households who face huge HMRC bill after pension change

UK households could face inheritance tax bills under the government's plans to include pension savings as part of your estate. The Labour Party Chancellor announced in the Budget that unused pension funds and death benefits will be subject to inheritance tax (IHT) of 40 per cent. This change will be implemented from 6 April 2027. At the moment you can give a pension to your child tax-free.

The move could raise almost £1.5bn a year by 2030, according to official estimates, but there are concerns this will result in a double taxation on unused pension funds on death for those over the age of 75 as pots will be subject to both income tax and IHT.

Jason Hollands, the managing director of wealth management firm Evelyn, said: “The impact of including unused assets in defined contribution pensions funds as part of an estate for IHT purposes is causing major concern. This measure will not only trigger much higher inheritance tax liabilities for those who don’t revisit their financial planning, it will also significantly widen the number of people falling into the web of IHT given private pension assets are now a higher proportion of total private wealth in the UK than property is."

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Jason added: “People who have worked hard all their lives and planned carefully to both secure their retirement and provide for their families after they die, are in many cases now having these plans completely upended. The measures being planned will compel some to draw down on their pensions, especially before age 75, to gift assets to their children and grandchildren. We also think it will prompt more older couples to marry or undertake civil partnerships in late life for financial and tax reasons.”

Jon Greer, head of retirement policy at Quilter, said: "Tax rules are already complex, and any changes should avoid imposing additional burdens on grieving families and their representatives. At present, pensions offer significant tax benefits, and pulling the rug out from under those who have planned their futures based on the current framework feels retrospective and unfair without some form of transition.”

Michael Summersgill, chief executive of AJ Bell, described the proposal as "arguably the most complex and costly way of raising tax from unused pensions on death” in a letter to the Chancellor. The letter - first seen by the Financial Times - said, “If the government presses ahead with the proposals as written, it will risk fundamentally undermining the UK pensions system.”