- Despite an overwhelmingly critical response to its consultation, government will press ahead with plans to apply IHT to pensions (Source: Inheritance Tax on pensions: liability, reporting and payment — Summary of responses)
- Plans largely unchanged from those first put forward in last year’s Autumn Budget, although personal representatives (PRs) will handle the reporting and payment of IHT as they already manage the rest of the estate
- It was previously proposed pension scheme administrators should handle the reporting and payment of IHT on pension funds
- AJ Bell 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:
“Despite a deluge of criticism government has decided to press ahead with plans to apply IHT to unused pensions on death.
“HMRC has blown its opportunity to bin the original proposals, stubbornly sticking with a system that will create confusion, complexity and additional costs for bereaved families. Options were put forward by the industry which would have been far more straightforward than bringing unspent pensions into IHT , while still raising the same amount of tax.
“Although most savers will be unaffected and should not need to change their financial plans, some now face difficult choices about how best to arrange their finances. Many have saved and invested in good faith and now face the possibility of punitive rates of taxation when passing pension money to their loved ones.
“Bereaved families also 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.
“This change marks a significant shift in the tax treatment of pensions and anyone concerned about the proposals should think about speaking to a professional financial planner. IHT is a complex area but there are steps which can be taken to help people plan ahead and ensure they organise their financial affairs tax to be tax efficient.
Burden shifts to personal representatives
“Faced with 649 responses to its technical consultation, most of them disagreeing with the direction of travel, HMRC has decided to make a fundamental shift in its approach to applying IHT to pensions.
“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 (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 closed in January on proposals to introduce an IHT liability on unused pension assets on death from April 2027. 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.
Earlier this month 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
