In the Autumn Budget 2024, the government announced several measures to reform Inheritance Tax and deliver what it calls “a fairer and less economically distortive tax treatment of inherited wealth and assets”. This includes a measure to make most unused pension funds and death benefits subject to Inheritance Tax from 6 April 2027, aligning their tax treatment with other types of inherited assets and removing the incentive to use pensions as a tax-planning vehicle for wealth transfer after death.
Most estates will continue to have no Inheritance Tax liability following these changes.
The government estimates that, out of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 estates – or around 1.5% of total UK deaths – will become liable to pay Inheritance Tax where this would not previously have been the case. Around 38,500 estates will pay more Inheritance Tax than would previously have been the case.
This group are forecast to have an existing average Inheritance Tax liability of £169,000, increasing by around £34,000 on average when pension assets are included in the value of the estate. These figures do not take into account potential behavioural changes following the announcement of these measures, such as individuals drawing down pension funds at a faster rate and/or making greater use of other exemptions or reliefs to reduce their estate’s overall Inheritance Tax liability.
The Treasury says it will
continue to incentivise pension savings for their intended purpose of funding retirement, supported by ongoing tax reliefs on both contributions into pensions and on the growth of funds held within a pension scheme.
This is entirely aligned to my view that we incentivise a wage for life both as social security and as a means to prevent citizens becoming a menace to others
However, implementing such a plan is harder than outlining it in the Budget
As part of these changes, from 6 April 2027 pension scheme administrators (PSAs) will become liable for reporting and paying any Inheritance Tax due on unused pension funds and death benefits. Currently, personal representatives (PRs) are responsible for reporting and paying any tax due for non-discretionary pensions schemes which are included within the value of a person’s estate for Inheritance Tax purposes.
The “nice” distinction between discretionary and non-discretionary payments had fuelled a thriving business in pension trusts , many of which legitimised tax-avoidance – specifically IHT avoidance. These trusts, the Government hopes, will become redundant.
The Government wants to include QNUPS to be included in the net , preventing those with UK IHT liabilities using offshore pension schemes to get round UK taxes.
It wants to pass the responsibility for collecting information on pensions from Personal Representatives (PRs) to Pension Scheme Administrators (PSAs)
And it will be amending its Inheritance Tax Calculator to help PRs, PSAs and HMRC to talk to each other and finalise liabilities as quickly, easily and accurately as possible.
The existing Managing Pensions Service (MPS) and Accounting for Tax (AFT) services will be used. If the AFT hasn’t arrived within six months, interest will be payable to HMRC on what the AFT shows to be due.
The 6 month deadline for the AFT to be submitted can be extended another six months for adjustments where new information comes to light. After 12 months, HMRC will expect the AFT to be final and after that it may impose penalties if returns are found to be false.
That said, it’s going to take three years to sort out the detail and get everything ready to go so we wait till 2027 for the new regime to come into place.
Not easy
Pension Scheme Administrators don’t appear to be happy with all this, though it gives them lots of new work at a time when GMP equalisation and McLeod should start to stop giving.
I suspect that most of the issues for administrators will be with dealing with distressed inheritors anxious to put bereavement behind them and sort out the financial affairs of the deceased.
Steve Webb has rounded on the heartless civil servants who have dreamt up these new rules
The obligations on the “bereaved person” when the “deceased person” has one or more pensions forming part of the estate are spelt out by Corporate Adviser (from the DWP Consultation)
So Scheme Pays and then the bereaved person pays. Steve Webb says that the whole process could become a bureaucratic nightmare as inheritors wait for pension schemes to provide information. Have we found a macabre new use for the pensions dashboard?
More acronyms for the hard of reading.
A QNUPS (a Qualifying Non-UK Pension Scheme), unlike a QROPS, (a Qualifying Recognised Overseas Pension Scheme) currently has no reporting requirements to HMRC.
Having not sought approval from HMRC and not being in a position to accept UK pension funds, the only reporting issues to be considered by QNUPS at the moment would seem to be their domestic ones, if any, in the territory in which it is established.
Good luck to HMRC in piercing that particular funeral veil.
The other area of concern is the inclusion of the death benefits from DB Pension Schemes. Ignoring the initial pension guarantee period, the major benefit caught is the death in service lump sum payment, usually expressed as x times annual salary which is paid at the Trustee’s discretion. The member has no opportunity to convert these benefits into taxable pension.
When the Trustees’ discretion is exercised in favour of an inheritance tax recognised spouse there should be no inheritance tax payable. However this raises important and possibly moral issues where either there is no spouse or the deceased has lodged an expression of wish form in relation to other beneficiaries e.g. children.
The position of unmarried but established co-habiting and financially dependent or inter-dependent partners is one area of concern (Remember the legislation introduced to extend spouse’s pension rights to this group for the armed forces). the other area is where the discretion is exercised in favour of financially dependent children (it used to be described as a widows and orphans benefit – orphans benefits would now be taxed). In both cases the inclusion of the lump sum into the Estate of the deceased both increases substantially the probability that the Estate will be subject to Inheritance Tax and where the Estate includes the domestic home there is a substantial risk that the home will have to be sold to pay the Inheritance Tax.
It also discriminates against life assurance provided through a pension scheme from that provided under a life insurance policy written under trust.
The DWP consultation is not very illuminating on the question of trustee discretion. In Case Study (1) it says that under the existing regime Emily’s DC Pot will pass to beneficiaries chosen by the trustees (having regard to the Expression of Wishes). As she does not have the power to ‘dispose of it as she wishes’ the pot remains IHT free.
Post 2027 it says the pot will become liable for IHT but gives no indication as to how the change might be effected. Presumably, it’s going to require rather material changes to trust law to compel a trustee to pay tax on behalf of a specific person, when as things stand currently they can, in theory if not practice, give deceased pensioners pot to the dogs home or anyone else
One of the great benefits of legislating then afterwards thinking is that pundits can explore the many rabbit holes for Alice to fall into.
What short memories not long-ago DC was being invited to be innovative and long term thinking. Such investments are illiquid.
The *IHT as to be paid from the pension before benefits can be drawn
The secondary market in illiquids will have a field day buying at a discount say 30% then 40% IHT and then 45% IT
77% tax
if paid by instillment I believe the interest rate is *9%
And that is only passing it down once. The annuity business will blossom
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