Inheritance tax warning over Labour pension plans as families face surprise bills

Ellen Milner, Director of Public Policy at the CIOT, said the changes risk creating unfair tax bills, delays in settling estates, disputes between families and pension providers, and increased administrative work for HM Revenue and Customs (HMRC).

The concerns come as an estimated £31billion in pension pots are thought to be lost or forgotten across Britain, with the average pot worth £9,470, according to Pensions UK.

The total value of lost pensions has risen by 60 per cent since 2018, increasing the likelihood of previously unknown retirement savings emerging after estates have already been finalised.

The central difficulty identified by the CIOT concerns what happens when a pension pot is discovered after HMRC has already granted clearance confirming that all inheritance tax due has been paid.

Under the Government’s proposed framework, executors would not be personally liable for tax arising from late discoveries.

However, HMRC could be required to revisit its original calculations, including tapering applied to the residence nil‑rate band, potentially leaving beneficiaries facing additional demands years later.

Nimesh Shah, CEO of Blick Rothenberg, said the proposals undermine the principle of finality in probate and inheritance tax, creating uncertainty for families and leaving estate administration “indefinitely open‑ended”.

Tracking down pension arrangements can be difficult, particularly where individuals have accumulated multiple schemes over their working lives.

Currently, individuals can pass on £325,000 tax‑free through the nil‑rate band, rising to £500,000 when a main residence is left to a direct descendant.

Married couples and civil partners can combine allowances, potentially passing on up to £1million without triggering inheritance tax.

The residence nil‑rate band tapers for estates worth more than £2million.

From April 2027, estate administrators will need to apportion the nil‑rate band between conventional assets and pension funds when calculating inheritance tax.

The CIOT warns this added complexity could create problems when previously unknown pensions come to light after an estate has been settled.

The organisation has proposed an alternative system under which a pension discovered after finalisation would be taxed at a flat rate reflecting the average inheritance tax position at the time the estate was settled.

This would avoid reopening the entire calculation.

For example, an estate worth £1.1million with £1million in allowances applied would face a 40 per cent charge on the remaining £100,000, producing an average estate rate of 3.6 per cent.

A pension discovered later could then be taxed at that rate.

Ruth Sadlier, Technical Officer at the CIOT, said the alternative avoids uncertainty for beneficiaries who may otherwise face clawbacks years after receiving their inheritance.

Adam Cole, Retirement Specialist at Quilter, urged families to keep clear records of pension arrangements and consider consolidating pots to make them easier to identify.

A Treasury spokesman said more than 90 per cent of estates will continue to pay no inheritance tax after the changes.

HMRC clearance will protect estate administrators from liability arising from undiscovered pensions, but beneficiaries could still face retrospective demands if a pension is found later.

The CIOT is calling for further legislative changes to ensure late‑discovered pension pots do not leave families facing unexpected tax bills or require estates to be recalculated years after they have been settled.