Colleagues have warned that the government’s proposed inheritance tax reforms for pensions could impose an unrealistic and potentially unmanageable burden on personal representatives, causing widespread delays, liquidity pressures and legal risks for those administering estates.
In a report published today, the House of Lords Economic and Financial Law Subcommittee examined the tax administration and practical impact of measures in the government’s draft Finance Bill 2025-2026. The investigation focused on changes to the inheritance tax treatment of unused pension funds and death benefits, as well as reforms to agricultural and commercial property tax relief.
One of the committee’s strongest criticisms relates to the decision to include unused pension funds within the scope of IHT while maintaining the existing six-month payment period. Experts concluded that it was “unrealistic” to expect personal representatives to meet this deadline, given how long pension scheme administrators typically take to provide assessments and release information.
The report warns that many private representatives incur late payment interest through no fault of their own, as pension assets are often not available within the statutory deadlines.
“It cannot be right to set a deadline for paying taxes when that deadline is impossible for many to meet,” the committee said.
Colleagues also raised concerns that personal representatives could be liable for IHT on pension assets that they neither control nor have access to, which could result in a significant drain on cash flow. The report warns that this could discourage both laypeople and professionals from acting as personal representatives, leading to increased costs and delays for survivors.
To address these risks, the Committee has called on the Government to introduce a statutory “safe harbor” that would protect personal representatives from late payment interest if they can demonstrate that reasonable steps were taken to meet the deadline but the delays were beyond their control. It is also recommended that the six-month IHT payment period on pension assets be extended to 12 months during a transition period to allow pension administrators time to update their processes.
The report also examines proposed reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR) and warns that these changes are likely to increase administrative complexity and exacerbate liquidity problems for properties.
Witnesses told the committee that many farms and family businesses are asset-rich but cash-poor, meaning that even where installment options exist, the interaction between valuations, probate and tight payment deadlines could result in assets being sold to pay off tax liabilities. Colleagues warned that this could jeopardize future business investments and succession planning.
The committee also heard concerns that the reforms could lead to a generational divide. While younger farmers and business owners may have time to adapt, older or more vulnerable owners have limited options, particularly due to anti-forestry regulations that limit the use of lifetime gifts.
Therefore, the Committee recommends that the IHT payment period be extended to 12 months for properties with qualifying APRs and BPR assets, and urges the Government to monitor the cumulative impact of the reforms over a seven-year period, particularly on farmers and family businesses.
Further concerns have been raised about how the death of a key person may affect the company’s valuation for IHT purposes. The committee said the government should consider how valuation rules reflect the loss of a key person and consider whether the current framework remains appropriate.
Peers also criticized the Government’s consultation process, saying the repeated changes to the late-stage proposals were the result of close and inadequate stakeholder engagement, causing unnecessary anxiety and costs.
Lord Liddle, Chairman of the Finance Bills Subcommittee, said: “Our inquiry focused on how the Government intends to implement these inheritance tax changes. Whilst we welcomed some of the adjustments made in Budget 2025, there is still much work to be done to ensure that these measures work in practice for private agents, businesses and farms.”
He added that the committee was particularly concerned about the impact on personal representatives dealing with estates in times of grief.
“Incorporating pensions into inheritance tax creates the risk of significant delays and additional costs, and many affected may be completely unaware of the impact these changes will have on them,” he said. “A recurring theme in our investigation was the lack of adequate advice. We want to ensure this doesn’t happen again.”
The report now puts pressure on ministers to reconsider the practical implementation of the reforms before the legislation is finally passed, as concerns grow that well-intentioned tax changes could have serious unintended consequences for families, businesses and the professionals responsible for managing estates.
