With the House of Lords Economic Affairs Committee taking further oral evidence later today in its inquiry into the Finance Bill and changes to inheritance tax (IHT), LCP are calling on the government to make major changes if the new rules are to be implemented fairly and effectively.
The firm argues that the April 2027 inclusion of pensions in the IHT net needs to be accompanied by a range of practical changes:
- Whilst the justification for the policy is that DC pensions were being used (by some) as a vehicle to avoid IHT, LCP says the scope of the policy goes far wider and includes ‘death in deferment’ lump sums from DB schemes and even small funeral grants from pension schemes; given that neither of these systems is being used to avoid IHT, it seems unfair to catch them in the scope of the policy.
- The person dealing with the estate (the ‘personal representative’) will be liable for ensuring that IHT is paid, but may have no control over some of the funds; one example would be a pension pot payable to a beneficiary who is not the personal representative; one option would be for the PR to be responsible only for IHT due on the rest of the estate, or for the PR to have the power to require the pension scheme or provider to deduct IHT before paying out.
- The new process could lead to a delay in money being released to those in need, including a widow or widower exempt from IHT. Under the new rules, it’s not clear assets can be paid until the whole process has been completed and the personal representative knows the value of all pension and non-pension assets and how these are to be split between exempt and non-exempt beneficiaries. This means that even a payout to a spouse – where no IHT can be due – could be put on hold for months. It would be better if such payouts could be released before IHT matters were resolved.
- The personal representative has to ensure IHT is paid within six months and beneficiaries will face the effect of interest and penalties if this is not done. But they may be penalised for matters beyond their control, such as delays in obtaining information about fund values and about other beneficiaries. Ideally a longer deadline or at least waiving the penalties and interest would seem appropriate in such cases.
- Given the time pressure on this whole process, more needs to be done to ensure that pension schemes become aware of the death of a member as soon as possible; changes which could help include:
o Letting the government’s ‘Tell us Once’ service share information with pension schemes and providers, saving the bereaved family from having to do this.
o Requiring registrars to share data about deaths more quickly and frequently than the currently monthly data feed.
- Given that probate can only be sought once all IHT due has been assessed and paid, and that probate itself can sometimes take months to be awarded, bereaved families could find themselves still sorting out the affairs of a loved on a year or more after the death; one way of streamlining this would be to allow the personal representative to apply for probate at once, and for the application to processed in parallel with sorting out the IHT: a ‘provisional’ approval of probate could then be ready to be activated once it was confirmed that IHT had been settled, thereby reducing the ‘end-to-end’ delay.
- Bereaved families may have difficulties in tracking down any pensions, and this will add further to the delay in sorting out the estate. Once the new pensions dashboard is up and running it should be made available to bereaved families, and the data displayed should be expanded to include unspent pension balances. This would be of great assistance to those trying to locate all of someone’s pensions following a death.
Trade association PIMFA also recently warned that proposals to bring unused pension funds and death benefits into the scope of inheritance tax are "unworkable and risk creating serious problems for bereaved families".
Alasdair Mayes, partner at LCP, said: “The rationale for this policy was to stop DC pensions being used for avoiding inheritance tax. But the new rules will capture other types of pension rights, including certain lump sum death benefits from DB pension schemes, where there could be no suggestion that they are being used to avoid tax. These types of benefit should be excluded from the changes. We also need to ensure that the new processes do not create delays in getting pension money to bereaved families. If the policy has to go ahead, much more thought needs to be given to minimising the impact on both grieving families and on pension schemes.”
LCP partner and former pensions minister, Steve Webb, who will be giving oral evidence to the Lords Committee later today, added: “The new regime will create a lot more work both for personal representatives dealing with estates and for pension schemes and providers. This is already a difficult time for families, and they will now face a ticking clock of six months before interest and penalties could apply if IHT is not sorted out. This deadline needs to be extended, otherwise people will be punished for something which may well not be their fault. Personal representatives should also not be held accountable for the IHT on pensions paid out to another beneficiary, as this is money they have no access to.”
