The government should extend the deadline for paying inheritance tax to a year and launch a public comms campaign in collaboration with the pensions industry, peers have recommended in a report that finds a lack of consultation means there are still multiple issues around applying IHT to pensions. 

When HM Revenue and Customs said last summer that personal representatives should report and pay IHT on pensions, not pensions administrators as first proposed  – some in the pensions industry who had been critical were jubilant. 

However, there is a second backlash as those in the wealth space highlight that as ever more families will be paying IHT, many may run into problems when pension pots will be in scope for IHT.

The report by the Lords Economic Affairs Finance Bill Sub-Committee, published on Wednesday, suggests that late payment interest, currently 7.75%, could become common as pension funds take longer to exercise their discretion over who should receive the pension pot of a deceased member, with one witness saying the “six-month deadline and the pension scheme processes are incompatible”. 

The Lords have, therefore, recommended extending the payment deadline to 12 months for a transitional period. 

“We are particularly concerned about the impact these changes will have on personal representatives administering an estate at a time of grief. The practical issues created by bringing pensions into inheritance tax risk causing significant delays and costs. Moreover, many of those affected may be entirely unaware of how these changes will impact them,” said Labour peer Lord Liddle, who chairs the committee.

He criticised “the government’s lack of proper consultation on these measures”, saying it has failed to listen to the concerns of stakeholders early on, resulting in late-stage changes and avoidable anxiety and costs for those affected by IHT changes.

“We want to ensure this doesn't happen again in the future,” he added. 

The committee points to a lack of public communication around the IHT changes. The government is planning to issue tools and guidance, but the Lords want concrete commitments. 

“We recommend that, in 2026, the government launch a communications campaign to inform people about the change in the IHT treatment of pensions with links to possible sources of further information to help individuals make informed decisions about their future arrangements,” they say. 

As part of that wider campaign, peers also want to see HMRC work with the pension sector to create a simple leaflet on the change to the IHT treatment of pensions, which pension scheme administrators can send to members”. 

In addition, more detailed information should be publicly available: “HMRC needs to publish, no later than December 2026, step-by-step guidance for PRs to explain what they need to do if the estate that they are administering includes a pension scheme. The guidance should be written in straightforward language and be readily comprehensible to a lay PR. It should be integrated with existing sources of guidance such as that provided by the Money and Pensions Service.” 

In addition, the rules could create confusion about which types of lump sum fall into scope. Peers want to see specific guidance on this, saying the government should publish “a document that sets out, for each type of scheme, the different type of benefit available to be paid to beneficiaries after a member’s death and how they will be treated for IHT purposes”. 

Crucially, although the government has said PRs will not be liable for tax on any pension schemes that are discovered after HMRC has given its blessing to the IHT calculation, the Lords argue that this statement is not enough. They call for safe harbour legislation to ensure PRs protected, particularly in light of the sheer number of lost pension pots in the UK. 

Further numerous issues are raised in the report, such as a ‘Catch 22’ as IHT must be paid on the entire estate to receive a grant of probate, yet many scheme administrators require a grant of probate to verify the identity of the personal representative.

The Lords also note the need for digital systems, saying it was "concerning" that less than 18 months before the new measure comes into effect there are doubts as to whether HMRC's new digital IHT payment system will be live by then.

The Investing and Saving Alliance’s head of policy for products and long-term savings, Renny Biggins, welcomed the report and said the proposals were made without proper industry consultation.

“The pension death claim process differs from the treatment of other assets subject to Inheritance Tax, and we fully support the recommendation to extend the payment deadline from six to 12 months,” he said. “Shoe-horning pensions into Inheritance Tax creates considerable complexity, particularly for lay personal representatives who will have little knowledge or experience in these matters. The process will delay payments from pension schemes to beneficiaries in many instances and create additional complexities for them at a vulnerable time in their lives.”

He believes raising awareness of the reforms and easy access to support to be essential.

Biggins also warns that scammers could try to exploit the situation. “Monitoring scam activity needs to be prioritised, as unscrupulous individuals may be looking to take advantage and gain access to the deceased's financial affairs by offering supposed free guidance to support people through the journey.”

Rachel Vahey, head of public policy at AJ Bell, called the new rules “an administrative nightmare” for PRs.

“AJ Bell and the wider pensions and financial advice industry argued long and hard that there were far simpler and easier ways of achieving the policy and financial aims that would sidestep this distress. But, as the House of Lords report points out, the government failed to listen to concerns of stakeholders early on, with the result that they are now tweaking rules late in the day to help ease the administrative burden. HMRC should be listening to the House of Lords’ recommendations to improve the new rules,” Vahey said.

As well as a safe harbour, she is calling for the six-month payment deadline to be extended permanently to 12 months, rather than only being a transitional measure, saying the deadline was set “in past centuries”.

She added: “We are now saddled with this unwieldly legislation. HMRC has already listened to pleas and changed the rules to allow PRs to ask pension schemes to pay the IHT due on the pension. But more changes are needed if we are to spare grieving families administrative pain and distress.”

Executors will face a significantly more demanding process once pensions are in scope, agreed Kenny McCall, sales manager at Utmost.

“With pensions set to become a central component of inheritance planning from 2027, early advice will be critical to avoid unintended tax consequences and administrative delays for the next generation,” McCall advised.