Grieving families face a “bureaucratic nightmare” under Rachel Reeves plans to drag inherited and private pensions into inheritance tax, a leading expert has warned.
Sir Steve Webb, former pensions minister, said the changes introduced by the Chancellor would lead to major delays and stress for many people dealing with bereavement.
Delivering her tax bombshell Budget on Wednesday Ms Reeves said she would move inherited pensions under the scope of IHT.
It could lead to hundreds of thousands more families paying the hated tax with campaigners warning it could cost them around £65,000.
And experts have warned the change will have an impact on planning, especially for those with larger estates and pension pots.
Sir Steve said: “Bereaved relatives already face huge challenges in winding up the financial affairs of a loved one, including delays in obtaining probate and the need to pay IHT bills before finances may become available.
“Including pensions within the scope of IHT will add greatly to the burden which families face.
“People will need to know which pension schemes to contact, will have to rely on the efficient administration of pensions – with the whole process on hold until the slowest scheme has replied – and then potentially wait months more before death benefits and pension balances can be released by the scheme.”
IHT is currently 40% and is usually paid on the value of a deceased person’s assets above a threshold of £325,000.
Currently, any money saved in a pension does not count towards this, but as of April 2027, inherited pensions will be included.
According to the Treasury, bringing unspent pots into the scope of IHT will affect around 8% of estates each year.
The measure is forecast to raise £640 million in 2027-28, rising to £1.3 billion in 2028-29 and £1.5 billion in 2029-30.
The threshold was already due to remain frozen until 2028, but the change will drag a higher number of estates above it as asset and property values increase over time.
More estates will owe IHT as a result, at the standard 40% rate.
Ms Reeves said: “The Government recognises people want to pass on their assets to their families, but the Government is making the inheritance tax system fairer by ensuring that wealthy estates contribute more to the public finances.”
At present, bereaved families already face two major challenges when it comes to dealing with IHT, according to Sir Steve.
IHT bills have to be paid before probate can be secured and obtaining probate itself can take many months, meaning finalising the financial affairs of a loved one can already be a drawn-out process.
But the details of the proposals for including pensions in IHT suggest that in cases where pensions form part of the estate, “the whole process will become much more convoluted”.
He added: “This could lead to delays, including delays in releasing death-in-service lump sums. And these lump sums themselves could be much reduced if subject to tax of up to 40%.”
The bereaved person then has to pay the balance of any IHT bill which does not arise from the pensions, such as the charge on property or other assets.
Sir Steve said: “The whole thing could turn into a bureaucratic nightmare for grieving families. If this proposal is to go ahead, the Government will need to come up with a much more streamlined process than is currently proposed.”
According to official estimates, around 49,000 estates per year which include pensions will face an IHT bill. This comprises 10,500 who would not have faced IHT at all if pensions were not included, and 38,500 who were already in the IHT net but will now face an additional bill.
