Thousands of businesses at risk as inheritance tax charge on pensions threatens commercial premises

Thousands of small and medium-sized businesses could face the threat of liquidation after pension assets become subject to inheritance tax in April 2027, experts at leading UK wealth management firm Evelyn Partners warn. 

Chancellor Rachel Reeves announced in her first Budget last year that unspent pension assets would from April 2027 become subject to IHT and the reform currently dictates that the pension scheme must itself settle its share of the IHT bill. 

With many business founders and owners holding their commercial property in their pensions, the new IHT charge could force a sale of premises or plant, of the business itself or even its closure as a going concern, if the pensions rule change goes ahead as planned. 

Gary Smith, financial planning partner and retirement specialist at wealth management firm Evelyn Partners, says: ‘This could be a serious problem for thousands of small and medium-sized businesses that is currently flying under the radar, probably because it’s not widely understood.  

‘Together with the host of tax and cost pressures on entrepreneurs and family businesses at the moment, owners and directors who don’t take advice or make preparations could fall foul of the new IHT charge - with the end result in some cases that their businesses are liquidated and jobs lost. 

‘Business founders and owners in certain circumstances have for many years been advised to hold their commercial property, like business plant or premises, in their pension. That could either be a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS). Under existing arrangements they could expect to live off rental income from their tenant (often their own business) in retirement via their pension and then pass on assets held in that pension tax efficiently to their beneficiaries on death, along with the firm itself, ensuring business continuity.   

‘However, with the changes coming in from 2027, on the death of the business owner, the business could face the prospect of a disruptive fire sale of their premises to meet a tax bill that could even jeopardise the survival of the firm. Under current government proposals, the IHT bill will have to be settled by the pension scheme itself, not from the overall estate, which is going to be very problematic when it comes to illiquid assets such as a commercial property, particularly in the tight timescale of six months that HM Revenue & Customs demands for IHT settlement.  

‘If this goes ahead as planned, those in this situation will have to think seriously about how to pay a future IHT bill. They could create liquidity ahead of death by building up a cash reserve within their pension (which would in itself increase a future tax liability) or persuade the business to buy back the property out of the pension, either of which could involve draining the business of funds and harm investment. Another options might involve the scheme having to borrow money to fund the IHT bill as a short term measure until the property can be sold.  
 
‘Alongside the new cap on Business Relief, higher capital gains tax, employer National Insurance hikes, a big jump in the minimum wage and the new employee rights legislation, this is just one more blow to entrepreneurs and small and medium-sized businesses. It’s not just about the impact on the business owners’ retirement plans but about the threat to jobs and investment and harm this will cause to entrepreneurialism in the UK, with SMEs being the beating heart of the domestic economy.’   

Andy King, pensions technical specialist at Evelyn Partners, who regularly talks to pension providers and has had discussions with HMRC during the consultation process on the Chancellor’s Budget IHT reforms, estimates that business owners with commercial property in their pensions could number tens of thousands but ‘at least 15,000’: 

‘While some of the pensions that own a commercial property might have enough liquid assets in the scheme to settle an IHT bill at death, many will not, and it seems awareness of this issue among the authorities is limited. The danger is that it is dismissed as a minor headache affecting a few business owners, when in fact – as the suggested implementation of the Budget reform stands – it could be something much wider and more damaging to family businesses, jobs and local communities. 

‘One remediation would be for the rules to be amended so that the pensions portion of IHT bills (which comes into effect from April 2027) does not have to be settled by the pension scheme itself, but rather could be settled by the overall estate. This stipulation that the IHT charge on the pension, for all individuals whether business owners or not, must be paid from the pension scheme creates a potential administrative headache and the design has attracted some criticism from pension providers, financial advisers and tax professionals.  

‘Even this change would only solve the challenge for some businesses. The problem would remain for those whose main or sole asset in the pension is a commercial property, as something will probably have to be borrowed or sold to meet the bill – and will that be the firm itself, its intellectual property or customer base?’ 

Gary Smith continues: ‘Holding business property in a pension might still make sense in some circumstances for certain people, and we can only advise clients on the basis of the law as it stands. It’s essential that those who currently have this strategy in place or are considering implementing it, talk with their financial planner or wealth manager to discuss the possible implications of the scheduled IHT reforms. 

‘We have one case where there are four directors of a company, they currently rent their premises from a third party. But they see this as wasteful, as money was leaving the business, and so they have decided to use their pension funds to buy a new commercial property for the business and the rent that the business pays will go into their pensions. That rent does not take up any annual allowance and pension schemes can borrow up to 50% of their value to enable a property purchase.  

‘While the property is in the pension, it doesn’t attract CGT so appreciation is tax free, so we can see the various incentives to use this strategy. 

‘Another retired client owns a commercial property in their pension worth £1.2million, on which the business tenant pays £100,000 rent a year into the pension for the use of that property. The client and their spouse use that annual sum to drawdown and live off. If the Chancellor’s IHT proposals are adopted as proposed then after April 2027, on the death of that individual the pension scheme could owe as much as £480,000 in IHT – but all the pension scheme owns is a property worth £1.2million.  

‘So what happens then? Will the pension scheme be able to borrow money to pay the tax bill, or will the business have to borrow money to buy the property, at high interest rates, and put cash in the pension scheme instead? Will the estate be forced to sell the commercial property? Or does the retiree have to stop drawing down the £100,000 a year they planned to live off to build up liquidity to pay a future IHT bill instead and in so doing expand the IHT liability? 

‘The restrictions to business and agriculture property reliefs also contained in the Autumn Budget have potential implications that have been well-aired, especially in the case of family farms. In some circumstances there are steps that can be taken to mitigate those issues through lifetime gifting and changing of wills. But you cannot gift your pension during your lifetime, so there’s going to be some very difficult and hard conversations if the IHT reforms go ahead as currently expected.’ 

Andrew King adds: ‘The big challenge here is the stipulation that the tax must come from the pension. If the only way to meet the bill is to sell the commercial property, then not only could that be hugely disruptive and endanger the business tenant but also selling such an asset can take many months and often years so then you run into a situation where interest is levied by HMRC, and greater penalties apply after two years. 

‘This problem could also affect people who have unlisted shares, whether in their own business or in other private companies, within their pension. If you can’t sell an illiquid holding quickly you might not be able to pay the tax.  

‘Business owners haven’t done anything wrong here. They’ve followed all the rules but could find themselves in a very sticky situation that causes havoc to their retirement plans and puts their business tenants in jeopardy. The issue has been raised with HMRC but it remains to be seen if any action will be taken to redesign the system. A further issue is that due to the volume of responses to the consultation which concluded in January, we’re not expecting much clarity on this until the end of this year at the earliest but probably spring of next year. 

‘We would encourage anyone affected by these uncertainties to seek professional financial advice and have the conversation with their advisers.’