Unlock Editor’s Digest for free
Roula Khalaf, editor-in-chief of the FT, selects her favorite stories in this weekly newsletter.
Pensions advisers and wealth management executives have urged the Treasury to rethink its plans on how to apply inheritance tax to pension funds, warning that current proposals could lead to serious delays and increased costs for bereaved people, even in cases where no inheritance tax is due.
In her budget last autumn, the Chancellor Rachel Reeves announced that pension funds would become part of inherited estates by April 2027, a move expected to upend tax planning for the wealthy but would raise £1.5 billion a year for the Treasury by 2030.
The government estimates its proposals will bring around 1.5 per cent more estates into the scope of inheritance tax in 2027-28, on top of the 4 per cent already above the £325,000 nil rate band, which can reach £500,000. where a property is passed.
But concerns were raised by tax and pensions professionals about the potential adverse effects during consultations on the technical details of the government’s proposals which close on Wednesday.
The Society Of Pension Professionals, a trade association, has warned that the government’s plans “impose unrealistic and impractical deadlines” while imposing interest charges or penalties on pension scheme administrators for delays “on which they have little or no control.
The heads of some of the UK’s biggest wealth managers, including Interactive Investor, Quilter and AJ Bell, have also written to the Chancellor about the “flawed and potentially damaging” proposals, calling on the Government to “work with the sector retreats to come to an agreement.” a simpler method of achieving the political objective.”
The letter, seen by the Financial Times, said: “The complexity of the proposed approach, namely the bundling of all pensions in estates for IHT, will result in substantial delays in the payment of money to beneficiaries in cases of death and will cause distress to bereaved families. »
Under the proposals, personal representatives of inherited pension funds would be responsible for identifying the funds and calculating the potential amount of IHT, taking into account other assets in the estate. The pension scheme administrator would then be responsible for paying inheritance tax before releasing the funds.
Experts say this could lead to delays in payments, including for those who do not owe the tax. Under current rules, inherited pensions can be paid more quickly to beneficiaries and used to pay probate, funeral costs and other urgent bills.
“The (new) process is complicated and it will punish lower income earners,” said Anna Rogers, senior associate at Arc Pensions Law. “Rich people don’t need money quickly. . . it appears that the harm will be disproportionate to those who are not wealthy and those who die young.”
Lawyers also worry that the six-month delay between death and the inheritance tax payment deadline does not allow enough time to identify pension funds and calculate tax, leaving individuals vulnerable to late payment fees.
“Pension plan rules allow two years to pay death benefits. . . it may be necessary to sell assets to pay the tax, but there may be cases where people are unable to pay, for example if a property needs to be sold,” said Jeremy Harris, partner at Fieldfisher .
The SPP urged the Government to either leave the calculation and payment of IHT to the pension’s personal representative and HM Revenue & Customs – or for the benefit to be taxed in full at 40 per cent and paid promptly by the plan administrator in the minority of cases. case where a pension is subject to IHT.
Steve Hitchiner, chairman of the SPP, said issues relating to the reporting and payment of inheritance tax on pensions were “vitally important” and current proposals “will result in many issues and challenges which could be widely avoided”.
Some death-in-service benefits, designed to provide financial security to dependents in the event of early and unexpected death, could also be subject to a hefty estate tax bill, in cases where they are implemented in place within the framework of a registered retirement plan.
“This could be a real disaster. . . At some point there will be a backlash,” Harris said.
Kate Smith, head of public affairs at Aegon, added that there was a lack of clarity on the scope and “no one thinks (the proposals) will work”.
The Treasury said: “We continue to encourage retirement saving with the intended purpose of funding retirement rather than it being overtly used as a wealth transfer vehicle. »