Applying UK inheritance tax to pensions ‘risks delays and high costs’

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Pensions advisers and wealth managers have urged the Treasury to rethink plans to apply inheritance tax to pension funds, warning that the current proposals could cause significant delays and increase costs for bereaved people. , even in cases where there is no inheritance tax.

In his budget last fall, councilor Rachel Reeves has announced that pension funds will become part of the inheritance in April 2027, a move aimed at disrupting the tax system for the wealthy but raising £1.5bn a year for the Treasury by 2030.

The government estimates its proposals will bring around 1.5% more places to the death benefit by 2027-28, on top of the 4 per cent already above the ‘nil-rate’ band of £325,000. up to £500.00. where the goods are transferred.

But concerns have been raised by tax and pensions experts about the potentially harmful effects of the debate on the technical details of the government’s proposals closing on Wednesday.

The Society Of Pension Professionals, a trade body, has warned government plans to “set unrealistic and unworkable deadlines” as it applies interest charges or penalties to pension scheme managers for delays “over which they have little or no control”.

The chief executives of some of the UK’s biggest wealth managers, including Interactive Investor, Quilter and AJ Bell, have also written to the chancellor about the “wrong and potentially dangerous” proposals, calling on the government to “work with the pensions industry to agree. the easiest way to achieve the policy objective”.

The letter, seen by the Financial Times, said: “The complexity of the proposed approach, which is to bring all pension estates for IHT, will lead to significant delays in paying beneficiaries on death and cause distress to bereaved families.”

Under the proposals, personal representatives of inherited pension funds will be responsible for identifying the funds and calculating how much if any IHT is owed, taking into account other assets. The pension scheme manager will be responsible for paying inheritance tax before releasing the funds.

Experts say this can lead to delays in payment, including by those who are not responsible for taxes. Under current laws, legacy pensions can be paid out early to beneficiaries and used to cover probate costs, funeral fees and other urgent debts.

“The (new) process is tough and will hit low-income earners hard,” said Anna Rogers, senior partner at Arc Pensions Law. “Rich people don’t need money quickly . . . it seems the harm will be disproportionate to the poor and those who die young.”

Lawyers are also concerned that the six-month window between death and the deadline to pay inheritance tax does not leave enough time for pension funds to be chosen and tax to be calculated, which leaving people vulnerable to late fees.

“Pension scheme rules allow two years to pay death benefits. . . there may be a need to sell the property to pay the tax, but there may be situations where people cannot pay, for example if the property needs to be sold,” said Jeremy Harris, a partner at Fieldfisher.

The SPP has recommended that the government leave the calculation and payment of IHT to the personal pension agent and HM Revenue & Customs – or that the profits be fully taxed at 40 per cent and paid immediately by the scheme manager to others how many are in a situation where the pension is subject to IHT.

Steve Hitchiner, chairman of the SPP, said the issues related to the reporting and payment of pension inheritance tax were “very important” and the current proposals “will result in a lot of problems and problems for me very much avoided”.

Other death benefit benefits, designed to provide financial protection for dependents if they die young, could also face a large inheritance tax bill , in cases where they are established as part of a registered pension scheme.

“There is a possibility of a big mess . . . at some point there’s going to be a disruption,” Harris said.

Kate Smith, head of public affairs at Aegon, added that there was a lack of clarity about what was out there and that “nobody thinks (the proposals) will work”.

The Treasury said: “We continue to encourage people to save their pensions for retirement purposes rather than for them to be used openly as a vehicle for wealth transfer.”