Applying UK Inheritance Tax to pensions ‘risky delay and high cost’

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Pensions advisers and wealth management chiefs have urged the Treasury to rethink plans for how inheritance tax will be applied to pension funds, warning that the current proposal could lead to serious delays and increased death costs even when inheritance tax is not paid.

Chancellor of the budget last fall Rachel Reeves He announced that the pension fund would become part of the Inheritance Fund in April 2027, a move coordinated by the tax plan for the wealthy, but would raise £1.5 billion a year from the Treasury by 2030.

The government estimates that the 2027-28 death penalty will bring in around 1.5 per cent more assets, more than 4 per cent above the already £325,000 nil-rate band, which could rise to £500,00. Where property is transferred.

But concerns have been raised by tax and pensions experts about the potential damaging effects of a consultation on the technical details of the government’s proposals, which closes on Wednesday.

The Society of Pension Professionals, a trade association, has warned that government plans to impose interest charges or penalties on pension scheme managers with “little or no control” would “impose unrealistic and impractical time limits”.

The chief executives of some of the UK’s biggest wealth managers, including Interactive Investor, Quitter and AJ Bell, have written to the chancellor about the “flawed and potentially damaging” proposals. A simple means of achieving the policy objective”.

The letter, seen by the Financial Times, said: “The complexity of the proposed approach, bringing all pension payments to IHTM, will result in significant delays in paying out payments to deceased beneficiaries and stress on the families of the deceased.”

Under the proposal, personal representatives of inherited superannuation funds will have to take into account other assets in the estate when calculating which IHT is owed and separate the funds. The pension plan administrator is responsible for paying inheritance tax before releasing the funds.

Experts say this could lead to delays in payments, including to those who are not liable for tax. Under current law, inherited pensions can be paid out to beneficiaries more quickly and used to pay probate costs, funeral expenses and other urgent bills.

“(The new) process is complex and penalizes low-income people,” said Anna Rogers, senior partner at Arch Pension Law. “The rich don’t need the money fast. . . The harm appears to be disproportionately among the less wealthy and those who die young.

The six-month window between death and the inheritance tax payment deadline leaves individuals vulnerable to late payments as the pension fund does not have enough time to identify and calculate the tax.

“Pension scheme rules allow two years for payment of death benefits. . . Assets may need to be sold to pay the tax, but there may be situations where people can’t pay, such as if an asset has to be sold,” said Jeremy Harris, a partner at Fieldfisher.

The SPP has urged the Government to speed up the calculation and payment of IHT to the pension personal representative and HM Revenue and Customs – or the benefit is fully taxed at 40 per cent – and paid by the scheme administrator. Pensions subject to IHT.

S.P.P. Steve Hitchiner, the chairman, said the issues surrounding the reporting and payment of inheritance tax on pensions were “very important” and that the current proposals “cause many problems and challenges that could largely be avoided”.

Certain death in service benefits, designed to provide financial security in the event of a person’s dependents dying suddenly young, can also face a large inheritance tax bill in cases where they are part of a registered pension scheme.

“It has the potential to be very messy. . . There will be an eclipse at some point,” Harris said.

Kate Smith, head of public affairs at Agon, added that there was a lack of clarity in the package and she thought “no one would act on[the proposals].

The Treasury said: “We will continue to encourage retirement savings to support retirement for their intended purpose rather than being used openly as a vehicle to transfer wealth.”