Parliamentary scrutiny has begun on the Government’s contentious inheritance tax reforms targeting pension wealth.
The Finance Bill Sub-Committee in the House of Lords initiated an evidence-gathering process to examine proposals that would bring pension assets within inheritance tax calculations, starting April 2027.
The inquiry will assess practical implementation challenges and evaluate whether ministers have properly considered the consequences for estate executors and pension providers.
These reforms could result in devastating tax burdens reaching 90 per cent on inherited retirement funds when combined levies are applied.
The inquiry will examine implementation challenges and whether ministers considered its impact
|GETTY/House of Lords
The Lords’ intervention follows widespread industry condemnation of the original proposals, which critics deemed unworkable and potentially harmful to beneficiaries through unnecessary delays and substantial costs.
Industry leaders have voiced sharp criticism of the Government’s determination to proceed despite overwhelming opposition.
Rachel Vahey, head of public policy at AJ Bell, said: "Despite a deluge of criticism of their original proposals, the Government stubbornly decided to press ahead, changing the detail to push the responsibility of calculating and paying inheritance tax firmly on the shoulders of personal representatives."
She warned that revised proposals fail to address fundamental issues.
"It quickly became apparent the new proposals didn't resolve any of the complexity; instead, they merely create new problems for bereaved families."
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Ms Vahey expressed hope that parliamentary scrutiny might prompt a change of course.
"Hopefully the Lords will be able to see what effect this will have and ask the Government to change direction."
The Treasury’s July announcement confirmed its intention to proceed with the reforms following 649 consultation responses that largely condemned the initial approach.
HMRC revealed a fundamental shift in its implementation strategy, transferring the burden of reporting and paying inheritance tax on pension assets from scheme administrators to estate executors.
This revised approach requires personal representatives to settle inheritance tax bills within six months of death.
Farmers have previously protested the inheritance tax raid
| PAThe tight deadline poses significant challenges for families managing complex financial affairs, particularly in cases of unexpected death where estate administration becomes more complicated.
Ms Vahey noted that whilst this change might enable beneficiaries to pay inheritance tax from other estate assets, potentially accelerating settlement, it fails to create a straightforward process.
The modifications merely redistribute administrative complications rather than eliminating them.
The proposed double taxation mechanism would create extraordinary financial burdens for beneficiaries.
Pension assets above inheritance tax thresholds would face a 40 per cent levy as part of the estate.
When beneficiaries withdraw funds after the holder’s death post-75, income tax is also applied at their marginal rate.
This dual system can create effective tax rates of 64 per cent for higher-rate taxpayers, rising above 90 per cent on larger estates where reliefs taper.
Such punitive charges could undermine retirement planning, turning pensions from tax-efficient inheritance tools into heavily penalised assets.
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What the nation thinks of tax raising measures
|AJ Bell/Opinium
The financial services sector has proposed simpler alternatives to the Government’s complex reforms.
AJ Bell suggests taxing withdrawals at beneficiaries’ marginal rates, ensuring fairness while simplifying administration after age-75 deaths.
In January, leaders from AJ Bell, Hargreaves Lansdown, Interactive Investor and Quilter jointly urged the Chancellor to scrap the plans, while TISA and Oxford Economics later offered alternative models meeting Treasury revenue goals without extra delays.
Public opinion also leans heavily against the reforms, with only 21 per cent of Britons in favour and 44 per cent opposed, making this the Government’s most unpopular tax change of its first year.