Administrators will not be liable for IHT payments

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HM Revenue and Customs is making personal representatives liable for reporting and paying inheritance tax on pensions, rather than pension scheme administrators. It has also clarified that all death in service benefits are out of scope.

In a summary of responses to its technical consultation that ran from late October to January, HMRC said many respondents and workshop participants were not opposed in principle to IHT being levied on pension wealth, but most raised “significant concerns” with the proposal to make administrators liable for reporting and paying.

“Although some of these issues were known at the time of announcement, the scale of the impact on PSAs and pensions beneficiaries became fully apparent during the consultation process,” HMRC admitted. Of the 649 responses to the technical consultation, most raised concerns with some or all of the proposed measures. 

One of the issues highlighted would be that in estates where no IHT is due – the government estimates these to be more than three-quarters of the estimated 213,000 estates annually with inherited pension wealth – inherited pension wealth would unnecessarily have to go through the IHT process under the administrator-led model.

Respondents also said administrators would probably pay the maximum possible amount, 40% of the value of any unused funds or death benefits, to avoid late payment interest after the six-month payment deadline, with HMRC noting that “this would likely lead to delays in paying out funds to pension beneficiaries”. 

Industry had previously warned that beneficiaries might face long waits under HMRC’s proposals, which could leave some without income.

In light of these responses, the government has decided not to make administrators report and pay IHT but personal representatives, saying that “this is consistent with the current process for non-discretionary pension schemes, and certain other assets which do not pass directly through the estate but are in scope of Inheritance Tax”. 

Death in service benefits out of scope


As well as the burden on administrators and delays for beneficiaries, a further bone of contention was the unclear formulation around death in service benefits, which seemed to suggest that insurance-based solutions were out of scope while others were not. This could have affected those in defined benefit schemes, mainly public sector workers, if left unaddressed.

HMRC has now clarified that “bringing death in service benefits into scope of Inheritance Tax would not be consistent with the broader rationale of ending the use of pensions as a tax planning vehicle”.

Therefore, from 6 April 2027 all death in service benefits payable from registered pension schemes will be out of scope of IHT. 

Administrators can make tax payment if needed 


The taxman has also set out how it envisages the process of reporting and paying IHT by personal representatives to work, though it admits that this “does not capture every scenario and will not be suitable for every estate with inherited pension wealth”. 

Crucially, it acknowledges that personal representatives will not always have direct access to pension benefits or sufficient funds within the wider estate to pay the IHT due on the pension component. For these cases, the government will therefore set up a new scheme through which beneficiaries can direct the pensions administrator to pay IHT directly to HMRC. Administrators will have to inform beneficiaries that they will be liable for any IHT and that this payment option exists.

Income tax on IHT payment to be refunded


Where both income tax and IHT are paid on the same pension benefits, HMRC said it “will develop mechanisms to account for any overpayments and ensure that these are refunded to beneficiaries”, so that no income tax is paid on the amount of pension used to pay inheritance tax. 

Savings industry proposes alternatives as burden shifts to families


Given the issues and debate about IHT on pensions, the revenue department said the government wants to work with industry experts and other stakeholders, with HMRC leading the process through its existing stakeholder groups for tax and pensions representative bodies, agents, and advisers. This will inform “further tools and guidance on the forthcoming changes to support PRs, PSAs, and beneficiaries ahead of implementation in April 2027”.

However, many in the savings industry are still unhappy with the proposals.

“HMRC has blown its opportunity to bin the original proposals, stubbornly sticking with a system that will create confusion, complexity and additional costs for bereaved families. Options were put forward by the industry which would have been far more straightforward than bringing unspent pensions into IHT, while still raising the same amount of tax,” said Rachel Vahey, head of public policy at investment platform AJ Bell.

Bereaved families are now confronted with “a huge administrative burden, with the government insisting they settle the IHT bill within six months”, she pointed out.

Given that many people have complex financial affairs, especially those who die unexpectedly, settling the bill quickly could be difficult, but “rather than saving them from a tortuous process, this feels like HMRC is doubling down by pushing even more problems firmly onto the plate of the bereaved to solve”, she said.

In January, the chief executives of AJ Bell, Hargreaves Lansdown, Interactive Investor and Quilter signed a joint letter to the chancellor’s office opposing the plans.

Earlier this month, the Investing and Saving Alliance and thinktank Oxford Economics outlined two alternative models to that proposed by HMRC. Both would keep unused pensions out of IHT estate calculations. Instead, beneficiaries would either be taxed directly at their marginal rate, or alternatively, a standalone flat rate 'inheritable pension tax charge’ would be due on benefits above a nil rate threshold. 

TISA’s head of retirement, Renny Biggins, warned that “the government’s proposal could lead consumers to reduce contributions, draw down savings early, or move assets out of pensions altogether, weakening consumer retirement outcomes and undermining pensions adequacy”.
 

Pensions could be back in Treasury's focus soon


Figures from HMRC show inheritance tax receipts have already hit £2.22bn between April and June, up about £130m since last year, even before pensions being in scope.

In January, the Office for Budget Responsibility said its central estimate for the costing of bringing pensions into IHT is a relatively modest increase in revenue of £1.5bn by 2029-30.

The OBR expects that while people will have more assets in drawdown products as defined contribution matures, some will change their behaviours in response to IHT, for example through gift giving, reducing the static tax yield by around 43%.

“There are upside and downside risks to the degree of attrition in the long term, and the yield from this measure is not likely to reach a steady state for several decades,” the OBR cautioned.

It said the costing is highly uncertain because of the range of options available to people, possible behaviour changes and uncertainty around self-reported pension wealth.

Speculation is already growing that the Treasury will announce further pensions taxes in the upcoming Autumn Budget as the chancellor seeks to maintain the government’s fiscal rules without touching the three biggest taxes.

A research paper for HMRC about the possible effects of changing or scrapping salary sacrifice for pensions has led some to believe that this is on the cards for autumn. 
   
   
 

Is IHT on pensions a good or bad idea in principle?


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