Bereaved families risk being forced into debt to cover inheritance tax bills under new pension rules, lawyers have warned.
From April 2027, pensions will be included in the inheritance tax calculation under Labour plans.
The reforms are expected to put families under financial pressure and increase demand for short-term loans, according to the Council for Licensed Conveyancers, a professional body for conveyancers and probate lawyers.
Inheritance tax must generally be paid before probate can be granted. This creates a catch-22 for families because a grant of probate is needed to unlock certain assets in the estate.
If inheritance tax is not paid within six months, HMRC charges late payment interest. This is currently 7.75pc – 4pc plus the Bank of England’s base rate. Paying six months late would currently add almost £4,000 in interest to a £100,000 inheritance tax bill.
Experts have warned that more families could end up financially squeezed and saddled with late payment interest because of the added complexity of bringing pensions into the inheritance tax net.
Under the reforms, personal representatives will be in charge of tracking down the pensions accrued over the deceased person’s lifetime, informing each pension scheme of the death and working out how much tax is due – a potentially complicated and time-consuming process.
Pension death benefits can take up to two years to be paid out to families, said Jo Summers, of the Society of Trust and Estate Practitioners, a trade body.
She added: “Requiring the inheritance tax on a pension to be paid in full before beneficiaries receive any funds may create significant financial hardship. Unless the rules change, more families may find themselves having to borrow.”
