Pension advisers and wealth management chiefs have issued stark warnings to the Treasury over plans to apply inheritance tax (IHT) to pension funds, cautioning that the proposed changes could cause severe delays and increased costs for bereaved families.
The changes, announced by Chancellor Rachel Reeves in her autumn Budget, aim to raise £1.5billion annually for the Treasury by 2030 by making pension funds part of inherited estates.
Industry leaders have described the proposals as “flawed and potentially damaging” in responses to Government consultations closing this week. The Government estimates its proposals will bring approximately 1.5 per cent more estates within the scope of death duties by 2027-28.
This increase comes on top of the four per cent of estates that already exceed the £325,000 nil-rate band. The threshold can rise to £500,000 in cases where a property is passed on.
Under the new proposals, personal representatives of inherited pension funds would need to identify the funds and calculate any inheritance tax owed, considering other assets in the estate.
Do you have a money story you’d like to share? Get in touch by emailing [email protected].
The Government is making changes to inheritance rules impacting pensions
GETTY
Pension scheme administrators would then be responsible for paying the inheritance tax before releasing the funds. The Society of Pension Professionals has warned that the government’s plans “impose unrealistic and impractical timescales”.
The trade association expressed concern about interest charges and penalties that could be imposed on pension scheme administrators for delays “over which they have little or no control”.
Steve Hitchiner, chair of the Society of Pension Professionals (SPP), said issues relating to the reporting and payment of inheritance tax on pensions was “vitally important”. He added that the current proposals “will result in numerous problems and challenges which could be largely avoided”.
Chief executives from major UK wealth managers, including Interactive Investor, Quilter and AJ Bell, have written directly to Reeves about their concerns over the looming raid from HM Revenue and Customs (HMRC).
Britons are preparing for drastic changes to inheritance tax rules GETTY In their letter, seen by the Financial Times, they warned: “The complexity of the proposed approach, namely bringing all pensions into estates for IHT, will lead to substantial delays paying money to beneficiaries on death and cause distress for bereaved families.”
The executives called on the Government to “work with the pensions industry to agree a simpler method of achieving the policy aim”. Under current rules, inherited pensions can be paid more quickly to beneficiaries and used for urgent expenses like probate costs and funeral charges.
Anna Rogers, a senior partner at Arc Pensions Law, warned that the new process would disproportionately affect those with lower incomes. “The (new) process is complicated and it will punish lower earners,” she said.
“Wealthy people don’t need the money quickly . . . it seems the harm will be disproportionately to those who aren’t wealthy and those who die young.” Lawyers have expressed particular concern about the six-month window between death and the inheritance tax payment deadline.
Jeremy Harris, the partner at Fieldfisher, noted that pension scheme rules typically allow two years to pay death benefits, highlighting potential timing conflicts. He said: “There may be a need to sell assets to pay the tax, but there might be cases of people not being able to pay, for example if a property needs to be sold.”
Death in service benefits could face significant inheritance tax bills in cases where they are part of registered pension schemes. “It’s got the potential to be quite a mess . . . at some point there will be a backlash,” Harris added.
LATEST DEVELOPMENTS:
Britons are being warned about the looming inheritance tax raid
PEXELS
Kate Smith, the head of public affairs at Aegon, highlighted a lack of clarity over what falls within scope of the changes. She noted that “nobody thinks [the proposals] will work”.
The Treasury defended its position, stating: “We continue to incentivise pensions savings for their intended purpose of funding retirement instead of them being openly used as a vehicle to transfer wealth.”
The SPP has suggested alternative approaches, including leaving the calculation and payment of inheritance tax to personal representatives and HMRC.
Alternatively, they proposed that benefits could be taxed at the full 40 per cent rate and paid promptly by scheme administrators in cases where pensions are subject to inheritance tax. These alternatives aim to address the industry’s concerns while maintaining the government’s revenue objectives.