- The House of Lords Finance Bill Sub-Committee has today launched a call for evidence to consider the government proposals to include pensions in inheritance tax (IHT) calculations (Source: Finance Bill Sub-Committee launches call for evidence | UK Parliament)
- The Lords are inviting responses on how the reforms will work in practice, as well as whether the government has sufficiently taken into account the impact of the reforms on personal representatives and pension schemes
- In July, HMRC published draft Finance Bill legislation, confirming it plans to go ahead with the proposals from April 2027
- However, plans to shift the liability for calculating and paying IHT on pensions to personal representatives (PRs) will still create complexity and confusion
- AJ Bell is among many names in the industry that opposed the original plans, which were unworkable and risked creating unnecessary delays and significant costs to beneficiaries
Rachel Vahey, head of public policy at AJ Bell, comments:
“The Lords are turning their scrutiny onto the controversial plans to introduce IHT on unused pensions on death following a call for evidence launched today.
“Despite a deluge of criticism of their original proposals, 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. But 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. Bereaved families will face a huge administrative burden, with the government insisting they settle the IHT bill within six months. Many people have complex financial affairs, especially those who die unexpectedly, meaning settling the bill quickly may not be straightforward.
“But it’s not too late. Ministers still have time to see that these proposals are not the best way to achieve their objectives. There are alternative solutions to taxing pensions on death that won’t cause the administrative frustration, delays in payment and concerns for bereaved families that the current set of proposals threaten to, while still raising the same amount for government coffers.”
Burden shifts to personal representatives
“In July, after receiving 649 responses to its technical consultation largely condemning its original proposals, HMRC announced that although it intended to go forward with its plans to apply IHT on unused pensions on death, 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 PRs, or executors, of the estate.
“This may alleviate some of the problems with the initial proposal, as beneficiaries might be able to pay the whole IHT bill from other estate assets, possibly resulting in a faster settlement. But it by no means creates a simple process.
“Bereaved and grieving families will still have to grapple with the additional complexity and confusion caused by adding unspent pension funds into the IHT liable assets. Rather than saving them from a tortuous process, this feels like HMRC is doubling down by pushing even more problems firmly onto the plate of the bereaved to solve.”
Punitive tax rates
“The government’s technical consultation on proposals to introduce an IHT liability on unused pension assets on death from April 2027 closed in January. The proposals mean any unspent pension assets on death will be treated as part of the individual’s estate and may be subject to IHT.
“Once 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.
“The double taxation proposed means that 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.”
Alternative proposals
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.
In January the CEOs of AJ Bell, Hargreaves Lansdown, Interactive Investor and Quilter signed a joint letter to the chancellor’s office opposing the plans.
In July TISA and Oxford Economics outlined two models that meet the government’s revenue and policy objectives while avoiding the risk of delays, confusion, and added pressure on bereaved families.
What the nation thinks of tax raising measures
According to AJ Bell research, pension IHT proposals are the most heavily opposed of the government’s key tax raising measures announced in its first year in office, with just a fifth of Brits (21%) saying they support the policy, due to come into force from April 2027, while 44% say they’re against the government’s plans.
Source: AJ Bell/Opinium. Data from 2,050 UK adults weighted to be nationally and politically representative.
