Thousands of families could be forced into a fire sale of properties owned by relatives because of the changes to inheritance tax rules.
More than 55,000 savers have commercial property in their self-invested personal pensions (Sipps), according to data from the Financial Conduct Authority (FCA), the City regulator.
The wealth manager Bowmore Capital, which obtained the figures, said: “Property can be very slow to sell, but in the past that has been less of a problem as there was no inheritance tax bill to pay on property held in a pension.
“This extra administration and cost will put further pressure on beneficiaries to accept fire-sale prices on commercial properties in Sipps to attract a buyer for the commercial property.”
From April 2027 pension pots will be subject to inheritance tax, with bills having to be settled within six months of the holder’s death. Any unpaid tax will be subject to interest charges of 8 per cent.
Those handed inheritance tax bills will want to sell assets to settle them to avoid large penalties, but if they inherit pensions that contain commercial property they may struggle. Because of the illiquid nature of commercial property, sales could take many months and, in some cases, years. This could lead to those who inherit having to settle for cut-price deals to offload the properties and pay their tax bills.
Inheritance tax is charged at 40 per cent but the rules allow you to pass on £325,000 of your estate tax-free — £500,000 if your estate is worth less than £2 million and you leave your main home to a direct descendant. Anything left to a spouse or civil partner is inheritance tax-free.
Holding commercial property in a pension has been widely recommended, because it allows rent from property investment to go into their Sipps without incurring income tax.
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The process for buying a commercial property through a Sipp is slightly different to buying directly because the property is ultimately owned by the Sipp rather than the investor. This also makes it harder to sell.
Of the 55,000 Sipps that hold commercial property, nearly 1,400 contain property abroad, while nearly 8,500 contain property investments with multiple owners, Bowmore said. Properties held like this can be even more difficult to sell.
Tomm Adams from the accountancy firm Blick Rothenberg said: “The government’s intention assumes a high degree of liquidity — either cash can be released from a pension almost immediately to cover the liability, or that there are enough liquid assets elsewhere in the estate to fund what is essentially a dry tax charge. This won’t always be the case.
More than 55,000 savers have commercial property in their Sipps
ALAMY
“Sipp users who might just have been looking to provide financial security for their loved ones’ future will now see their heirs paying up to 67 per cent in combined inheritance tax and income tax, leading to a significant drop in wealth and, potentially, no means to pay the tax bill on time. I would urge the government to rethink its strategy.”
HM Treasury said: “We continue to incentivise pensions savings for their intended purpose of funding retirement instead of being openly used as a vehicle to transfer wealth — more than 90 per cent of estates each year will continue to pay no inheritance tax after these and other changes.”