Inheritance tax warning as pension changes could force families to take out costly loans

Families could be forced to take out expensive short-term loans to pay inheritance tax bills, the Council for Licensed Conveyancers warns.

The organisation represents conveyancers and probate lawyers.

Under the new rules, those responsible for dealing with an estate must find every pension the person held, inform each provider of the death and work out the total tax owed.

Experts warn this could be complicated and take considerable time.

Families can also face a difficult situation: inheritance tax usually needs to be paid before probate is granted, but probate is needed to access many assets in the estate.

Delays in pension payouts could make matters worse. Jo Summers, of the Society of Trust and Estate Practitioners, says beneficiaries can wait up to two years to receive the money.

HMRC starts charging interest if the tax remains unpaid after six months. The current rate is 7.75 per cent, four percentage points above the Bank of England’s base rate.

At that rate, a further six-month delay in paying a £100,000 inheritance tax bill would add nearly £4,000 in interest.

Ms Summers warned that the rules as they stand could cause real hardship. “Requiring the inheritance tax on a pension to be paid in full before beneficiaries receive any funds may create significant financial hardship. Unless the rules change, more families may find themselves having to borrow,” she said.

For those who do turn to short-term lending, the costs can be punishing. Interest rates on such loans range from 0.5 per cent to two per cent a month before fees, meaning annual charges can exceed 20 per cent.

Laura Bywater, of law firm JMW, highlighted the practical difficulties. “Delays in liaising with perhaps multiple pension providers and calculating the proportion of tax owed by each means that personal representatives may have to consider taking out loans to cover the inheritance tax bill to avoid punitive late payment interest charges,” she said.

Peter Bedford, the shadow pensions minister, backed the concerns raised by legal professionals.

“These are legitimate concerns. Families should not be forced into high-interest debt to pay inheritance tax or pass on their homes,” he said.

Earlier this year, the House of Lords put forward a proposal to double the six-month payment window to 12 months for pension assets, giving families more breathing room. The Government turned it down.

A Treasury spokesman defended the policy, arguing that pension savings ought to serve their original purpose of funding retirement rather than functioning as a tax-free route for passing on wealth.

The spokesman added that more than 90 per cent of estates would continue to face no inheritance tax liability following these and other reforms.

Despite the concerns, there are options that some families may not be aware of. Kieran Bowe, of law firm Russell-Cooke, pointed out that executors can spread inheritance tax payments over a decade rather than settling the full amount upfront. “Executors can elect to pay inheritance tax over 10 years rather than in a single upfront payment.

By choosing the instalment option, in most cases only 10 per cent of the inheritance tax due on non-liquid assets, such as property, must be paid before a grant of probate is issued,” Mr Bowe said.

Families also have the right to request that HMRC postpone some or all of the tax and interest if they are unable to access the deceased’s assets.

However, interest continues to build during any deferral, and families are still required to pay as much as they can from whatever funds are available to them.