HMRC’s Two-Tier IHT Plan Threatens Pensions With Double Taxation

The Anatomy of the Draft IHT Changes

As the April 2027 implementation deadline approaches, HM Revenue & Customs (HMRC) has released further details regarding its strategy to bring unused pensions under the inheritance tax (IHT) umbrella as reported by AJ Bell. While pensions face the existing possibility of income tax upon withdrawal, the newly detailed framework introduces a contentious two-tier system. Under this plan, crucial tax reliefs historically granted to standard estate assets are entirely denied to assets sitting inside a pension wrapper.

This structural misalignment means executors could face higher tax bills, unexpected late payment interest, and rigid asset management constraints during an already vulnerable period of bereavement. Rather than aligning pension assets smoothly with traditional estate planning tools, the draft framework carves out exclusions that penalize individuals solely because their wealth is housed within a pension fund.

Missing Reliefs and the Threat of Double Taxation

The core friction points in HMRC's draft rules center on three specific reliefs that apply to standard investments or properties held in vehicles like ISAs, but vanish when those same assets reside within a pension:

• Loss on Sale Relief: Executors can typically claim an IHT refund if qualifying investments—such as shares—are sold for less than their valuation date at death. This safeguard is absent for pension-held investments.
• Business and Agricultural Property Relief (BPR and APR): These vital mechanisms reduce the taxable value of qualifying family farms or business assets by up to 100% (capped at £2.5 million), preventing families from being forced to sell operating enterprises to clear tax bills. They will not apply to farmland or businesses held inside pensions according to AJ Bell's analysis.
• Instalment Options: HMRC ordinarily permits executors to pay IHT on illiquid assets like commercial property in up to ten equal annual instalments. This liquidity flexibility disappears if the commercial property is held within a pension.

Compounding these lost reliefs is the genuine threat of double taxation. Pension assets could first be treated as estate capital subject to IHT, and subsequently taxed as income in the hands of the beneficiary if the pension saver dies aged 75 or over. For higher-rate taxpayers, financial analysts calculate this cumulative friction can generate an effective tax rate of up to 64% on inherited pension assets.

Curiously, the framework does preserve quick succession relief, which mitigates double taxation when identical assets pass through multiple estates within a five-year window. Yet the absence of broader protections leaves advisers and industry bodies warning that the complexity far outweighs sensible policy objectives.

Wider Pension Landscape and Regulatory Timelines

The inheritance tax dispute is part of a broader wave of administrative and regulatory shifts occupying the UK pensions sector. Parallel to the IHT developments, HMRC has opened consultations on transitional rules for the Normal Minimum Pension Age (NMPA) tracked by A&O Shearman. The NMPA is scheduled to rise from age 55 to age 57 on April 6, 2028. Draft regulations outline that members aged 55 or 56 as of April 5, 2028, who have already taken affirmative steps to access their benefits, will be shielded under specific transitional provisions.

Meanwhile, day-to-day administrative changes are also registering for benefit and pension recipients. The Department for Work and Pensions (DWP) confirmed that payments scheduled for the summer bank holiday Monday will be advanced, ensuring state pension and universal credit recipients receive their funds prior to the long weekend as announced by GOV.UK.

Signal Versus Noise

It is vital to separate routine administrative adjustments—such as bank holiday payment rescheduling—from the structural structural changes represented by the HMRC's two-tier IHT proposal. The early August payment schedule is a recurring calendar event with zero impact on long-term wealth.

Conversely, the exclusion of BPR, APR, and loss on sale relief from pension assets represents a foundational shift in estate planning architecture. As the April 2027 implementation date approaches, financial planners note that families holding commercial property, agricultural land, or substantial active portfolios inside pensions face difficult structural decisions. Unless HMRC revisits its draft framework to establish parity across asset classes, executors will navigate a landscape marked by unnecessary complexity, reduced liquidity, and punitive tax burdens.