'Give families more time to pay Inheritance Tax bills on pensions', Lords Committee urges Government

Currently, you have six months to pay any IHT due – with interest of 7.75% applied on late payments. The Government first announced that pensions would become subject to these IHT rules during 2024's Autumn Budget.

It later confirmed that it'll be the person administering an estate – known as the personal representative – who will be responsible for reporting and paying IHT on pension funds (rather than the pension provider).

At the time of the Budget, the Government estimated that an additional 10,000 estates would become liable for IHT in the 2027-28 tax year as a result of the changes, while an extra 40,000 estates would have to pay more IHT.

"Significant steps" needed

The House of Lords Economic Affairs Committee's new report says the rules risk placing too much of a burden on personal representatives, who are often family members or friends of the person who has died. It argues that the current payment timescales could punish these people even where they've acted "diligently".

The Committee has therefore urged the Government to "take significant steps" to ensure the its new rules can work in practice, including:

• Extending the deadline for paying IHT on pensions to 12 months. The six-month deadline is "likely impossible to meet" for many – so it "cannot be right" to impose this on taxpayers, the report said. Extending this would give personal representatives "a more realistic opportunity to comply", and would mean they're not unfairly punished while pension providers update their processes in line with the new rules.

• Temporarily suspending late-payment interest and penalty fees. Families should not be charged these for at least two years after pensions become subject to IHT. In addition, interest should never be charged where families can show that the reason they couldn't pay on time was outside of their control, the Committee added.

• Prioritising "getting the policy and processes right" over an April 2027 start date. The Government should "take the time now to find a workable process for managing the IHT process for pensions rather than rush to a solution that falls short of what is needed", according to the report.

• Ensuring the 'Pensions Dashboard' is up and running before April 2027. This long-awaited service should eventually allow you to check all of your pensions in one place online. The Committee said the Government should make sure the dashboard can be accessed by personal representatives, to help them track down the deceased person's pension funds.

• Publishing step-by-step guidance for those affected by December 2026. This should explain what people need to do if the estate that they are administering includes a pension scheme. The Committee also recommended that the Government launches a wider communications campaign about the changes, adding that "clear communication and HMRC guidance will be essential".

How Inheritance Tax bills currently work

At the moment, you won't be charged IHT on anything you leave to a spouse or civil partner after you die. Pensions are not currently included when working out the total value of your estate for tax purposes, and instead, Income Tax may be applied at varying rates. More details on the current system can be found in our Inheriting a pension guide.

However, the Government announced that Inheritance Tax would begin to apply to pensions from April 2027 during 2024's Autumn Budget. This means the value of your pensions when you die will be added up with your other assets to calculate whether your estate will pay IHT.

If the value of your estate is above £325,000 (or £500,000 if you're leaving your home to a direct descendant), any pension funds above that threshold will be liable for IHT at 40%.