Lisa Webster: A thorny question of pensions and IHT

From a pensions point of view the biggest news from the Budget was undoubtedly the fact that from 6 April 2027, pensions will fall into the deceased’s estate and therefore be liable for inheritance tax. The fact that some additional tax would apply to pension death benefits didn’t come as a huge shock. Since the Pension Freedoms in 2015, the tax treatment has been generous to say the least. Now that the lifetime allowance has been scrapped, we are left with the current rules where unlimited funds can be passed on completely free of any tax if the member dies before age 75 and the beneficiaries take the death benefits as income. What was more surprising, is that inheritance tax was chosen as the means of taxation. The practicalities of how this policy will apply is out for consultation. What is clear is that it is very much trying to put a square peg (pensions) into a round hole (inheritance tax). There are numerous challenges with the proposed process put forward by HMRC. Not least of these is the fact that pension schemes would need to pay any inheritance tax liability on the pension funds within six months of the member’s death. Ironically, the day after the Budget I had a death benefit case come across my desk where the member had died in 2018. Although the fund size was only five figures, the estate was over a million so had we been in the new regime, inheritance tax would have applied, along with a huge chunk of late payment interest. Under current pension rules, the scheme has two years from knowledge of the member’s death to distribute death benefits before there are potential tax implications. The inheritance tax six-month deadline applies from the end of the month the member dies – the fact the pension scheme administer may not even be aware of the death isn’t considered in the proposed process. Even when we get informed of a death promptly, we are meant to provide the fund value to the personal representative, and whether benefits are going to the spouse (which will impact availability of nil rate band elsewhere), within two months. In complex cases where the trustees must consider different beneficiaries this is just not realistic. There’s also the issue of paying the tax within six months if the pension is mainly invested in illiquid assets – commercial property being the obvious example. On a more positive note, unlike the lifetime allowance removal, we do have a reasonable time frame for these changes. HMRC is talking to industry representatives to consult on the practicalities. The technical consultation runs until 22 January and will be followed by a consultation on draft legislation. With over two years until implementation there is time for some of these issues to be ironed out. You can’t help but think though that applying income tax to death benefits, perhaps with a spousal exemption for death under 75 (or normal minimum pension age if they wanted to be less generous), would have been far simpler to implement. Lisa Webster is senior technical consultant at AJ Bell. She is an economics graduate with over 15 years’ experience in financial services. Prior to joining AJ Bell in May 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. She is part of the AJ Bell Technical Team. Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Twitter: @lisasippster

Lisa Webster: A thorny question of pensions and IHT

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