New HMRC 'double tax' update as date set for pension rule change

New HMRC 'double tax' update as date set for pension rule change Unused pension pots are set for a major change Families could face a new tax double whammy on pensions under plans due to come into force in 2027, experts have warned. Unused pension pots are set to be dragged into the inheritance tax net from April 6, 2027, potentially exposing thousands of families to a hefty tax bill when a loved one dies. But new HMRC plans could make the controversial changes even more costly by denying pension assets some of the valuable inheritance tax reliefs available to other parts of an estate. HMRC says the reason for bringing unused pension funds into IHT from April 6, 2027, is to tackle what it describes as 'distortions' in the current tax system. In its May 2026 technical note, HMRC says the reform is intended to remove distortions that have resulted in pensions increasingly being "used and marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement". It also says the change will remove inconsistencies in how different types of pensions are treated for IHT. Analysis by pension and investment firm AJ Bell warns that the proposed system could create a two-tier inheritance tax regime, with families potentially paying more tax simply because assets are held inside a pension. HMRC has confirmed in a technical note that several key inheritance tax reliefs will not apply to assets held in pensions. These include loss on sale relief, business property relief and agricultural property relief, as well as the ability to pay inheritance tax in instalments on certain assets. Rachel Vahey, head of public policy at AJ Bell, said: “Dragging unused pensions into the inheritance tax net from April 2027 was already a major blow for families, but HMRC’s proposed approach risks making a bad policy even worse. “Under the plans, inheritance could be subject to a two-tier tax system, where important reliefs available on other assets are denied on assets sitting inside a pension. That means estates could face higher tax bills, extra late payment interest and less flexibility at exactly the point families are already dealing with bereavement.” She said HMRC's reasoning was difficult to reconcile with the decision to bring pensions into the inheritance tax system. Ms Vahey added: “HMRC’s justification is hard to square. It says these reliefs should not apply because the pension saver does not own the pension assets, yet those same assets are being pulled into the saver’s estate for IHT purposes.” Pension 'double whammy' There is also a potentially even bigger sting for some beneficiaries. Pension assets could first be subject to inheritance tax as part of the deceased's estate and then, where the pension saver dies aged 75 or over, withdrawals by beneficiaries can be subject to income tax. AJ Bell says this could produce an effective tax rate of up to 67%, depending on the beneficiary's income tax rate. What could happen to a £100,000 inherited pension? IHT rate - Income tax rate - Amount left - 40% - 20% - £48,000 - 40% - 40% - £36,000 - 40% - 45% - £33,000 So, under the most severe example, a £100,000 pension could leave a beneficiary with just £33,000 after tax. Ms Vahey said: “Worse still, pensions may be taxed twice: first as estate capital for IHT and then, where the pension saver dies aged 75 or over, as income in the hands of the beneficiary. “For higher-rate taxpayers, that could mean an effective tax rate of up to 64% on inherited pension assets. Pensions should be treated as capital or income, not both.” AJ Bell's illustrative table supplied with its analysis shows the effective tax rate rising to 67% where a beneficiary is subject to the 45% income tax rate. Reliefs denied One of the concerns centres on loss on sale relief. This can allow executors to claim back some inheritance tax where certain investments are sold for less than their value at the date of death. AJ Bell says the relief can apply to qualifying investments held in an ISA but would not apply to equivalent investments held within a pension. Another issue is business property relief and agricultural property relief. These can reduce the taxable value of qualifying farmland and business assets, subject to the applicable limits and rules. But the reliefs will not apply to qualifying farmland or businesses held inside pensions under HMRC's proposed approach, according to AJ Bell. The firm warns this could leave some estates facing higher inheritance tax bills. There is also a concern over the way tax bills would have to be settled. HMRC allows inheritance tax on certain assets, including commercial property, to be paid in up to ten yearly instalments. But AJ Bell says that flexibility would not be available where the commercial property is held through a pension, potentially putting pressure on executors to sell assets more quickly. One relief will remain Not every inheritance tax relief is being removed from pension assets. Quick succession relief will apply. This can reduce inheritance tax where the same assets are taxed again after being transferred between estates within five years. However, the relief is subject to detailed rules and the amount available reduces depending on how much time has passed between the transfers. Ms Vahey said the Government should reconsider its approach before the new rules take effect. She said: “Ideally government would go back to the drawing board and look at simpler options for taxing pensions on death. If it won’t do that then, at the very least, it should treat pensions the same as other assets under the IHT system, rather than creating the double standard proposed by HMRC.” The changes are due to take effect from April 2027, meaning families with substantial pension savings have less than a year to understand how the new inheritance tax rules could affect them.