Inheritance tax (IHT) reforms risk creating a regime that penalises pensions unfairly compared to other assets, AJ Bell has warned.

The financial services firm said that HMRC was planning on operating a ‘two-tier’ IHT system, where certain IHT reliefs available under the main estate will not apply to pensions.

These reliefs included loss on sale relief, business relief and agricultural relief, and the ability to pay IHT on property in instalments.

HMRC has said that as the member is not treated as owning the pension assets, reliefs were not applicable.

However, AJ Bell argued that it could be interpreted that HMRC was already treating pensions as belonging to the member when bringing them into the IHT estate.

From April 2027, most unused pension funds and death benefits will be included within an individual’s estate for IHT purposes.

AJ Bell stated that pensions will already be penalised from being taxed once under IHT as estate capital, and a second time as income for the beneficiary if the person dies aged 75 or over.

“Under the plans, inheritance could be subject to a two-tier tax system, where important reliefs available on other assets are denied on assets sitting inside a pension,” commented AJ Bell head of public policy, Rachel Vahey.

“That means estates could face higher tax bills, extra late payment interest and less flexibility at exactly the point families are already dealing with bereavement.

“HMRC’s justification is hard to square. It says these reliefs should not apply because the pension saver does not own the pension assets, yet those same assets are being pulled into the saver’s estate for IHT purposes.

“The result is an unfair and unnecessarily complex system. Families could lose access to loss on sale relief, business property and agricultural property relief and the option to pay IHT in instalments on certain assets, solely because they are held within a pension.

“Worse still, pensions may be taxed twice: first as estate capital for IHT and then, where the pension saver dies aged 75 or over, as income in the hands of the beneficiary.

“Ideally, government would go back to the drawing board and look at simpler options for taxing pensions on death. If it won’t do that then, at the very least, it should treat pensions the same as other assets under the IHT system.”

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