STEP has warned that government plans to bring pensions into the scope of inheritance tax will create ‘unworkable complexity’ and unfair interest charges.
From April 2027, most unused pension funds and pension death benefits will be included in the value of a deceased person’s estate for IHT purposes.
In response to HMRC’s latest technical update on the proposals, the professional body for trust and estate practitioners is urging the Government to simplify its proposed changes on how IHT is applied to pensions. It warned that the proposed framework remains fundamentally flawed, overly complicated and heavily skewed towards the perspective of pension scheme administrators (PSAs).
STEP said the complexity could lead to significant probate delays, deter people from acting as executors, increase costs and create unintended consequences for grieving families and legal risks for those managing a deceased person’s estate.
Emily Deane, technical counsel and head of government affairs at STEP, said: “These changes significantly increase the burden on executors who are navigating the loss of a loved one. At what is already a difficult time, individuals may be expected to track down multiple pension arrangements, engage with providers before probate and deal with complex and evolving tax requirements.
“What is needed is a fair system that works for all parties involved and without simplifications, there is a real risk of delays, higher costs and growing reluctance to take on the executor role.”
While STEP said it acknowledged that the Government has addressed some of its previous concerns that personal representatives (PRs) could be liable for IHT on pensions they do not control, it noted that the technical update fails to fully address the underlying complexity and potentially significant liabilities and risks for ordinary people trying to handle the estates of friends and loved ones.
The new processes introduced in HMRC’s technical note also depend on consistent and timely responses from pension providers.
According to STEP, a number of issues remain. These include the issue of automatic interest, with the proposed system automatically incurring interest on unpaid IHT, potentially penalising families for standard administrative processing times.
It also pointed out timing misalignments, classification risks as well as cashflow and recovery difficulties, noting that without a fully workable direct payment process, the burden of paying IHT on pensions will initially fall on the deceased’s free estate. Recovering this tax from pension beneficiaries could prove incredibly difficult or uneconomical, especially if beneficiaries are unknown, located overseas or uncooperative.
Under the new rules, executors will need to track down and engage with all of a person’s pension arrangements. If further pensions are discovered later, this could force a reallocation of nil-rate bands and change beneficiaries’ tax liabilities after administration is already underway.
STEP said there is also “limited clarity” on what constitutes reasonable steps to identify all pension arrangements, increasing the risk of uncertainty and delays.
To improve clarity and fairness, STEP has put forward a number of recommendations to HMRC and the Government.
These include calculating IHT at the pension fund level, rather than making PRs responsible for managing the tax for each individual pension beneficiary; extending the direct payment scheme to cover IHT on pensions so that PSAs can be instructed to pay the tax directly to HMRC; and putting in place an automatic grant on credit.
Deane added: “These reforms are going ahead but there is still time to make them work better in practice and without overwhelming people with unnecessary complexity.”
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