Can the House of Lords change the government’s mind on controversial inheritance tax reforms?

The House of Lords is set to scrutinise the government’s controversial inheritance tax overhauls.

Chancellor Rachel Reeves announced in her 2024 Autumn Budget that pensions would be included in an estate for inheritance tax (IHT) purposes from 2027 and there are also plans to scale-back agricultural and business reliefs.

The government is pressing ahead with the inheritance tax reforms, despite criticism.

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Many of these changes are now going through Parliament in the draft Finance Bill amid warnings about complexity and confusion.

The House of Lords Finance Bill Sub-Committee has this week launched its own inquiry into the change.

Peers from across the chamber are looking for views on plans to make unused pension funds part of a person’s estate for IHT and reforms to agricultural property relief and business property relief.

Rachel Vahey, head of public policy at AJ Bell, which is among the critics, expressed hope that the House of Lords can convince the government to change direction.

She said: “Hopefully the Lords will be able to see what effect this will have and ask the government to change direction.

"Bereaved families will face a huge administrative burden, with the government insisting they settle the IHT bill within six months. Many people have complex financial affairs, especially those who die unexpectedly, meaning settling the bill quickly may not be straightforward.”

Inheritance tax pension reforms

Under current plans, pensions would count towards the value of an estate for IHT from April 2027.

This creates plenty of financial planning challenges

But the inquiry is keen to know how challenging it would be for personal representatives to identify and report inheritance tax due on unused pension funds and death benefits and the impact on pension schemes administrators.

Peers are also questioning how much awareness there is of the changes and if more is needed.

Changes to agricultural property relief

Currently, an estate that contains farmland and assets will receive 100% IHT relief using agricultural property relief as long as it was actively farmed for more than two years.

The government intends to restrict the relief to the first £1 million after 6 April 2026.

This applies to combined agricultural and business property reliefs.

Above this amount, landowners will pay inheritance tax at a reduced rate of 20%, rather than the standard 40%.

This has prompted protests from farmers and the House of Lords is seeking views on the impact, complexity and awareness of the changes and how easy it will it be for those affected to report and make arrangements for funding the inheritance tax due within the statutory six-month period?

Lord Liddle, chair of the Finance Bill Sub-Committee, said:

“In its draft Finance Bill, the Government is proposing a measure to bring unused pension funds and death benefits into the scope of Inheritance Tax. It is also making significant changes to agricultural property and business property reliefs.

“The Finance Bill Sub-Committee's work does not look at the rates of tax proposed by the Government. Instead, it makes recommendations on how the government’s tax policy can best be implemented and administered.”

'Not too late to stop reforms'

The government has faced protest and criticism about the changes in its consultations.

In January the chief executives of AJ Bell, Hargreaves Lansdown, Interactive Investor and Quilter signed a joint letter to the chancellor’s office opposing the plans.

Vahey added that it’s not too late for the government to change its mind and AJ Bell has suggested alternatives.

One is applying income tax on withdrawals from inherited pension at the marginal rate of the beneficiary if the person dies before age 75.

Vahey said: “Ministers still have time to see that these proposals are not the best way to achieve their objectives. There are alternative solutions to taxing pensions on death that won’t cause the administrative frustration, delays in payment and concerns for bereaved families that the current set of proposals threaten to, while still raising the same amount for government coffers."