Chancellor, Rachel Reeves, has announced plans to remove the concession for pension pots to be passed on to anyone free of inheritance tax (IHT) as part of her Autumn Budget.

Reeves confirmed the change alongside plans to extend the freeze on IHT thresholds from 2028 until 2030, and plans to restrict the generosity of agricultural property relief and business property relief for the wealthiest estates.

“We will close the loophole made by the previous government, and made bigger when the lifetime allowance was abolished, by bringing inherited pensions into inheritance tax from April 2027,” she stated.

This was also confirmed in the Budget papers, which stated: "The government is making the inheritance tax system fairer by applying inheritance tax to unspent pensions pots."

Lawhive head of legal operations, Daniel McAfee, suggested that removing the IHT exemption for residuary pension funds could generate “significant additional revenue” for the government, as it would bring a larger portion of pension wealth within the scope of inheritance tax.

Standard Life retirement savings director, Mike Ambery, also said that it is “perhaps no surprise” that the government has decided to bring pensions into scope for inheritance tax as their exemption was little-known to the public.

Society of Pension Professionals Tax Group chair, Steve Hitchiner, agreed that the announcement was “not entirely unexpected”, arguing that “overall this makes sense, and is a more attractive solution for raising revenue than many of the speculated alternatives such as reforming pensions tax relief or imposing NICs on employer pension contributions”.

Indeed, Hargreaves Lansdown head of retirement analysis, Helen Morrissey, said that the generous treatment of pension death benefits has “long been considered low hanging fruit for a government in search of cash”.

“Today that fruit has been plucked as pensions will now be made subject to inheritance tax," she added, warning however, that this could prove complex and will need changes to trust law to make workable.

“A much easier solution would have been a return of the so-called “death tax” that existed pre-Freedom and Choice and it is important that the industry engages with government during the consultation process to make sure unnecessary complication is not introduced," she stated.

Hitchiner also stressed the need to see the detail and how this will interact with the practicalities of different pension arrangements.

In particular, St James’s Place divisional director of retirement and holistic planning, Claire Trott, said that “the devil will be in the detail to determine if this includes only lump sums, or if it also includes benefits passed down by way of an income”.

She continued: “In addition, we need to know how this will work for defined benefit pension schemes, if included, where individuals have no access to increased income to pay a charge.

"The delay in implementation of this change is welcome, allowing these questions to be resolved and giving individuals some time to plan."

Barnett Waddingham partner, Martin Willis, also suggested that there are many technical questions which must be answered.

“It's unclear how this will interact with the lump sum and death benefit allowance (LSDBA), and inherited drawdown funds which will be taxable as income when withdrawn,” he stated.

“And what happens when the pensions funds have to be withdrawn/taken as a taxable lump sum in order to fund the IHT bill? Will there be an expectation that pension schemes will pay IHT to HMRC before the distribution of death benefits? We must hope these questions have already been answered, rather than leaving savers in limbo for the weeks ahead."

And whilst there could be some benefit to the Treasury, Ambery stressed that pensions are a long-term investment, arguing that it is "vital" that large-scale changes to how they are taxed are well managed to avoid any risk of undermining confidence in pensions and scaring people from engaging with their retirement savings.

“Carefully thought through implementation and clarity will be key, perhaps most prominently in the case of unmarried partners who could be at a disadvantage," he stated.

"This is because the IHT spousal exemption means married couples and civil partners are allowed to pass their estate to their spouse tax-free when they die, however benefits paid to an unmarried partner can face IHT charges.

"Now pensions are set to fall into scope for IHT, surviving unmarried partners could end up with less income and therefore a lower standard of living in retirement.”

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