Reeves Under Pressure to Extend Inheritance Tax Deadline as Pension Rules Change
Chancellor Rachel Reeves is facing mounting calls to grant families additional time to settle inheritance tax bills following warnings that upcoming legislative changes will render the current payment timetable completely unworkable. The pressure stems from a significant reform that will, for the first time, include pension pots within the calculation of an individual's taxable estate from April 2027.
Unworkable Timelines and Mounting Concerns
The House of Lords Finance Bill committee has issued a stark warning regarding the practical challenges these changes will create. Currently, inheritance tax due must typically be paid within six months of a death, with the first instalment required within that period. However, the inclusion of pensions introduces new complexities.
Lord Roger Liddle, chair of the scrutinising committee, highlighted the impending difficulty for grieving families. "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," he told peers.
The committee's central recommendation is to extend the payment window to a full year. Furthermore, they have urged the government to waive interest charges on late payments in situations where delays are caused by circumstances beyond a family's control, such as slow responses from pension providers.
Industry Experts Echo Calls for Reform
Financial experts have strongly endorsed the Lords' findings, criticising the government's current approach as out of touch with reality. Jon Greer, head of retirement planning at Quilter, argued that the six-month deadline is impractical for executors dealing with pension assets for the first time.
"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," Greer stated.
He emphasised that executors acting in good faith should not be penalised with interest charges while waiting for third-party information. The current interest rate for late IHT payments is set at 7.75%, a figure established under Chancellor Reeves' oversight in 2024.
The 2027 Pension Inclusion and Its Implications
The core of the issue lies in the forthcoming policy shift. Presently, pensions are excluded from the value of an estate for inheritance tax purposes. From April 2027, this will change. Pension wealth will count towards the standard nil-rate band of £325,000 that can be passed on tax-free.
Assets above this threshold are generally subject to a 40% tax rate, although various reliefs and allowances can reduce liability. These include the spousal exemption and the residence nil-rate band, which can add a further £175,000 tax-free allowance if a main home is left to direct descendants.
Mark Plewes, head of pensions at WBR Group, was scathing in his assessment, labelling the government's proposals as creating an "overly complex and burdensome system." He warned that the strict valuation window is particularly unworkable for pension schemes holding illiquid assets or offering discretionary benefits.
"These timelines simply do not reflect operational realities and we would urge the government to reconsider on this point," Plewes asserted, adding that measures potentially discouraging pension saving are deeply concerning for long-term financial security.
A Call for Prudent Policy Implementation
The unified message from the Lords and industry leaders is a plea for the government to learn from past policy errors and ensure robust preparation before implementing the 2027 changes. Experts warn that rushing a half-baked policy risks leaving families, executors, and financial advisers to manage the fallout.
The Treasury has been approached for comment on the calls for an extended deadline and revised approach to the inclusion of pensions within inheritance tax calculations. The outcome will be closely watched by millions of families across the UK who are planning for their financial futures.
