Could pensions inheritance tax rule change create liquidity crisis for Sippholders?

Tens of thousands of self-invested personal pension (Sipp) plans with property holdings could land their beneficiaries with an inheritance tax (IHT) nightmare after new rules come into effect next year.

Loved ones may not have enough time to sell commercial property assets held in the more than 50,000 plans within a crucial six-month HMRC deadline, warns financial firm Bowmore Financial Planning.

Unused pension funds, including those from Sipps, will be subject to IHT from April 2027, as announced by the chancellor Rachel Reeves in the 2024 Autumn Budget.

However, plans with commercial property holdings could leave their beneficiaries scampering to find cash to pay IHT bills upon the owner’s death.

Figures obtained from the Financial Conduct Authority (FCA) via a Freedom of Information request by Bowmore reveal there are currently 54,387 Sipp plans that hold commercial property.

Commercial property includes offices and industrial and retail units. Sipp owners can invest in a commercial property fund, which pools money from multiple investors to buy and sell properties through an investment manager.

The money in a Sipp can also be used to directly buy commercial property, with any rental income earned from it exempt from income tax.

Why commercial property in Sipps poses an IHT risk

Commercial property is a relatively illiquid asset, meaning it can be hard to sell quickly, unless you drastically lower the price.

IHT is normally due within six months of someone’s death. But Bowmore warned that, from April 2027, beneficiaries may struggle to sell commercial property in order to raise liquidity to foot the IHT bill fast enough to meet this deadline.

Payment plans can be agreed with HMRC if the six-month deadline is missed, but interest will accrue on any unpaid tax.

John Clamp, financial planner at Bowmore, said: “Introducing IHT on pensions fundamentally changes the risk profile of holding commercial property inside a Sipp.

“These assets were never designed to be accessed quickly, and with the changes to IHT rules families could suddenly find themselves trying to raise a six-figure tax bill without the liquidity to do so.”

A Treasury spokesperson said: “We continue to incentivise pension savings for their intended purpose of funding retirement instead of being openly used as a vehicle to transfer wealth – more than 90% of estates each year will continue to pay no inheritance tax after these and other changes.”

What should Sipp owners invested in commercial property do?

Clamp said one option is a ‘Whole of Life’ (WOL) insurance policy.

These policies pay out a guaranteed lump sum upon someone’s death, which can be used by beneficiaries to pay an IHT bill and prevent them from having to sell assets, like commercial property, instead.

You will have to pay the insurer for one of these policies, but it could prove more cost-effective than having to rush through the sale of commercial property.

Another is by reducing the value of your estate by spending more of your money so any eventual IHT bill is lower and the sale of any commercial property by your beneficiaries is not needed.

The rules can be incredibly complex, Clamp added, so it’s worth seeking advice from a financial adviser.