Chancellor Rachel Reeves is moving forward with controversial plans to include unused pension funds in estates for inheritance tax purposes from 2027, according to a newly published consultation. Originally announced in her first Autumn Budget last year, the measure forms part of a broader package of proposed inheritance tax (IHT) reforms.

A technical consultation on implementing the change has now concluded, with the findings revealing minimal alterations to the initial proposals. Under the current plan, personal representatives (PRs) will be responsible for reporting and paying IHT on unused pension funds, aligning with their current role in managing the rest of the deceased’s estate. This represents a shift from an earlier suggestion that pension scheme administrators would take on that responsibility.

Pensions experts have described the changes as ‘grossly unfair’ (Image: Getty)

The Government said reforms will help remove “distortions”, which have led to pension schemes being increasingly used and marketed as a tax planning vehicle to transfer wealth, rather than for funding retirement.

It added that it also removes “inconsistencies” in the inheritance tax treatment of different types of pensions.

However, the reforms have garnered significant criticism from the pensions industry and other financial experts. Rachel Vahey, head of public policy at AJ Bell, said: “Despite a deluge of criticism, Government has decided to press ahead with plans to apply IHT to unused pensions on death.

“HMRC has blown its opportunity to bin the original proposals, stubbornly sticking with a system that will create confusion, complexity and additional costs for bereaved families. Options were put forward by the industry which would have been far more straightforward than bringing unspent pensions into IHT, while still raising the same amount of tax.”

Ms Vahey noted that, although most savers will be unaffected and should not need to change their financial plans, some now face difficult choices about how best to arrange their finances.

She added: “Many have saved and invested in good faith and now face the possibility of punitive rates of taxation when passing pension money to their loved ones. This change marks a significant shift in the tax treatment of pensions, and anyone concerned about the proposals should think about speaking to a professional financial planner.”

Anita Wright, chartered financial planner at Ribble Wealth, said the new plans “introduce uncertainty and may prompt individuals to withdraw funds prematurely or reconsider pension saving altogether.”

She also noted that placing the burden on personal representatives rather than pension scheme administrators adds “administrative complexity” at an already difficult time for families.

She added: “Executors may lack the specialist knowledge to calculate tax correctly on pension assets, particularly when those pensions are held across multiple schemes or involve complex beneficiary arrangements.”

Samuel Mather-Holgate, Independent Financial Adviser at Mather and Murray Financial, said the change was “grossly unfair”. He said: “There’s still time for Rachel Reeves to backtrack on this grossly unfair proposal. Not only had savers been incentivised to put money in pensions because of their flexibility and tax efficiency, but they’ve fallen from the most tax-effective to probably the worst place to keep your money if you’re worried about IHT.

“If you die aged over 75, you have the double standard whammy of IHT on your fund and income tax for the beneficiary when they draw the benefit.”

What is inheritance tax?

Currently, estates valued over £325,000 are taxed at 40%, a threshold known as the “nil-rate” band, which has remained unchanged since 2009. Ms Reeves has confirmed that these thresholds will stay frozen until 2030.

In addition to the standard nil-rate band, there is also the residence nil-rate band (RNRB), which was introduced in April 2017.

The RNRB allows individuals to leave their main residence to direct descendants, such as children or grandchildren.

The RNRB is £175,000, making the combined total of the nil-rate band and the RNRB up to £500,000 for an individual who qualifies for both.

Married couples and civil partners can take advantage of the inheritance tax thresholds through a “transferable nil-rate band.”

This allows the unused portion of the first spouse or civil partner’s nil-rate band to be transferred to the surviving partner’s estate upon their death, increasing the nil-rate threshold to as much as £1million.

There are a number of ways to manage your wealth inheritance tax efficiently – read more here.