In this article, Dan Bosiacki, Technical Consultant at AJ Bell, looks at where we are now, where we are going, and some potential bumps in the road for both legal personal representatives and pension scheme administrators.
It is probably fair to say the industry continues to hold its breath on the introduction of unused pension funds into the inheritance tax (IHT) regime from April 2027 despite the framework of the rules largely being in place.
Specifically, I want to shine some focus on potential bumps in the road for the legal personal representatives (LPRs) and pension scheme administrators (PSAs) dealing with more complex estates and why it will be important for both parties to work closely with paraplanners and their advisers to achieve the best outcomes within the tight timeframe for settling any tax.
Where we are
Under current rules, the inheritance tax bill for the deceased’s estate must be paid by the end of the sixth month after death. For example, the deadline is 31 August for a death during the month of February. If you miss this deadline, HMRC will apply late payment interest at 4% plus base – this can build up quickly especially for the larger estates.
Now consider that pensions will be added to this melting pot of complexity.
In terms of distributing death benefits from a pension, there was already much for PSAs to do on death of a member, and this change in the rules will leave precious little time to do it. Valuing the pension scheme upon notification of the death can take at least a couple of weeks where the investment portfolio is vanilla in nature.
Gathering the death certificate, copy of the will and other documents the PSA needs during what is understandably a sensitive time for relatives of the deceased can take time too, all required before the identification of beneficiaries can begin. It is little wonder that some situations can run HMRC’s two-year deadline close.
But from April 2027, LPRs will have to get information in from each pension scheme the deceased was a member of, and in time to allow them to submit the paperwork to HMRC (including listing out the beneficiaries of the pension pots), finalise the calculations for IHT, and pay any IHT bill due before that six month ticking deadline runs out.
Where we are going
Under the new rules, the LPRs’ responsibility for calculating and paying the IHT due from the whole estate, including the pensions, may cause some issues, especially where the pension beneficiaries differ from the LPRs and/or the estate beneficiaries.
It feels like an age ago now, but you may recall the government confirming on Budget Day that the LPRs can instruct the deceased’s pension scheme that 50% of any death benefit exceeding £1,000 that isn’t to be paid to an exempt beneficiary, such as a spouse or civil partner, can be withheld for up to 15 months.
They can also instruct the PSA to pay the IHT bill before releasing the remaining funds to the beneficiaries of the pension.
This development could give the LPR the control that can sometimes be vital where the pension is being distributed to non-exempt beneficiaries – for example – children from a previous marriage or extended family members, where it might not be straightforward later for the LPR to reclaim the IHT due.
By asking the PSA to hold onto a portion of the pension, the LPR can carry out the essential management of the estate, calculate any liability for IHT due and submit the IHT400 to HMRC safe in the knowledge that not all pension funds have been distributed before this process completes.
This solution may not apply for much of your typical estate planning cases where arrangements are straightforward and unlikely to change, for example spouses passing funds to the other, to their children or their siblings upon their passing.
But these options should be considered for those cases with the potential to be more complex, where there are numerous families with a potential interest or where there may be disputes or further representation required.
LPRs will hopefully feel the benefit of the change in stance from the Treasury and hopefully PSAs will feel less strain than what once looked likely.
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