The House of Lords is set to scrutinise government plans to bring unused pensions into the scope of inheritance tax.
In its draft Finance Bill, the Government proposed a measure to apply inheritance tax on unused pensions and death benefits from April 2027, in a move that was widely criticised by the advice industry.
The Lords Finance Bill Sub-Committee has launched a call for evidence to consider the impact of the proposal, as well as reforms to agricultural property relief and business property relief.
It is calling for evidence from taxpayers, advisers and relevant organisations.
Lord Liddle, chair of the Sub-Committee, said: “The Sub-Committee’s work does not look at the rates of tax proposed by the Government. Instead, it makes recommendations on how the Government tax policy can be implemented and administered.
“These are important changes. To inform our work we want to hear from as broad a range of people and organisations as possible.”
The Government’s proposals have come under fire from industry experts, who warn that they risk creating unnecessary delays and significant costs to beneficiaries.
In July, after receiving 649 responses to its technical consultation largely condemning its original proposals, HMRC announced that although it intended to go ahead with its plans, it would make a fundamental change. Instead of pension scheme administrators handling the reporting and payment of IHT on unused pension funds on death, this responsibility will shift to the personal representatives, or executors, of the estate.
Rachel Vahey, head of public policy at AJ Bell, said: “Despite a deluge of criticism, the Government stubbornly decided to press ahead, changing the detail to push the responsibility of calculating and paying IHT firmly on the shoulders of personal representatives.
“It quickly became apparent the new proposals didn’t resolve any of the complexity; instead they merely create new problems for bereaved families. Hopefully the Lords will be able to see what effect this will have and ask the Government to change direction.”
Vahey said bereaved families will face a huge administrative burden, with the Government insisting they settle the IHT bill within six months.
There is also the issue of punitive tax rates, says Vahey. Once the inheritance is passed to the beneficiary, income withdrawn from the pension may then also be subject to income tax at their own marginal rate depending on the age of the member when they died.
This double taxation means pension assets will be subject to a 64% effective tax rate on death where the pension pot exceeds the IHT nil rate band allocated to the pension and the beneficiary is a higher rate taxpayer, rising to as much as 90% or more where the residence nil rate band is tapered away entirely.
AJ Bell, alongside other providers, has campaigned for the Government to consider alternative measures which would be simpler and fairer to implement.
For example, income tax applied on withdrawals at the marginal rate of the beneficiary would be a far simpler alternative and means those inheriting pensions with the highest incomes pay more tax, while also offering simplicity given pension assets are already subject to income tax where the member dies after age 75.
Respondents have until 7 October to submit their written evidence to the Sub-Committee.
Main image: danielle-claude-belanger-0lSe_t9AhYI-unsplash
