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AJ Bell call to make pensions and ISAs exempt from IHT

26 June 2018

AJ Bell has called for the UK government to exempt pensions and ISAs from inheritance tax as part of its mission to simplify the savings landscape. 

In response to a request by the Office of Tax Simplification for evidence on IHT, AJ Bell says it described the current HMRC rules as “arcane”, forcing most providers to exercise discretion over how pension death benefits are paid out.

Where discretion is not used, or a pension is transferred or contributions increased while someone is in serious ill-health, the money left becomes subject to IHT, potentially leaving loved ones with a 40% tax bill. However, exercising discretion has its own challenges, often leading to significant delays in making payments while all the necessary information is gathered.

Cases where transfers are made in ill-health, and therefore potentially liable for IHT, can prove particularly difficult because providers are forced to withhold an amount equal to the potential IHT liability until the estate has been settled or risk being pursued by HMRC for any unpaid IHT.

AJ Bell, which has assets under administration of over £42bn, said removing pensions from IHT would reduce the administration for a large number of deaths.

Peter Hopkins, technical director, AJ Bell, said: “Rules effectively forcing pension providers to apply discretion to shield savers from IHT are from a bygone era and need to be revisited. Almost everyone assumes pensions are always IHT-free and that funds automatically go to the beneficiaries they’ve chosen. Few realise that pensions are only free of IHT if providers go through a discretionary process resulting in delays and costing money that would otherwise go to the bereaved.”

Hopkins said the government could remove those costs “at a stroke” by ringfencing all pension death benefits from IHT, including those paid without discretion. He added that it made no sense for schemes to second guess nominations solely to avoid IHT, dubbing it an “anachronism” that doesn’t fit pensions in the 21st century.

In addition, AJ Bell said making ISAs exempt from IHT would simplify the system, with an exception for contributions made while in ill-health and to avoid IHT.

“The government should consider making ISA exempt from IHT so there is one simple set of IHT rules covering long term savings whether they are in an ISA or pension tax wrapper,” Hopkins said.