Imagine losing a loved one, only to be hit with a ticking tax bomb. That’s the harsh reality for families grappling with inheritance tax, which must be paid to HM Revenue & Customs within a mere six months of a death. But here’s where it gets even more daunting: changes to how inheritance tax is calculated on pensions, farms, and small businesses are making it increasingly difficult for families to sort out their affairs in such a short timeframe. A House of Lords committee has stepped in, urging the government to extend this deadline to a full year. They argue that the current system is simply too harsh, especially when families are already dealing with the emotional and logistical challenges of bereavement.
And this is the part most people miss: while the taxman allows bills to be paid in up to ten annual instalments, the first payment must still be made within those initial six months. The committee also calls for HMRC to waive interest on late payments when delays are beyond a family’s control. This is a critical point, as interest charges can add up quickly—currently set at the Bank of England base rate plus 4 percentage points, totaling 7.75% annually. To put that into perspective, a Freedom of Information request revealed that HMRC collected over £150 million in late payment interest on income tax in just one tax year.
Lord Liddle, who chaired the committee, highlights the growing complexity of inheritance tax, particularly when it comes to pensions. From April 6, 2027, money left in a pension will be considered part of a taxable estate, meaning it will count toward the £325,000 tax-free allowance. Anything above this threshold could be subject to a hefty 40% tax. While spouses and civil partners can inherit tax-free and even combine their allowances for a potential £1 million tax-free threshold, the process remains convoluted. For instance, pension firms often take longer than six months to locate pension pots and identify beneficiaries, especially in complex family situations.
Here’s where it gets controversial: the chancellor’s changes to inheritance tax on farms and small businesses have added another layer of complexity. From April, farmland worth up to £2.5 million can be passed on tax-free, with any value above that taxed at 20%. Similarly, small businesses will enjoy a £1 million tax-free allowance, with a 20% tax rate on anything above. But valuing farms and businesses is no simple task. Farms, for example, involve assessing equipment, livestock, and even additional income streams like farm shops or rental properties. Lord Liddle warns that despite these changes, many farms and businesses will still get caught in the tax net.
Nicholas Hyett from Wealth Club sums it up well: extending the inheritance tax deadline by six months is just the beginning. The government must do more to make its tax reforms truly workable for grieving families. The committee’s recommendations are now headed to the House of Commons for consideration, but the question remains: is this enough to ease the burden on families already reeling from loss? What do you think? Are these changes fair, or does the system need a complete overhaul? Share your thoughts in the comments—let’s spark a conversation about the future of inheritance tax.
