Skip to content

Executive Summary

We think the proposals to apply Inheritance Tax (IHT) on pension death benefits risk making dependants worse off because they apply too broadly and the way in which it is proposed to implement them is incompatible with the realities of members’ lives.

Trustees of occupational pension schemes usually decide who the beneficiaries are having taken time to establish the member’s circumstances, which can be sensitive and time-consuming. The proposed requirement to pay inheritance tax due within six months is unrealistic and much too short, especially as IHT applies across a member’s whole estate. It fails to take into account how pension scheme administrators operate.

Members’ deaths are sometimes notified to the Trustees by tracing services rather than Personal Representatives (PRs) – but it is not uncommon for no PR’s to have been appointed. Schemes may not therefore be in any position to know if any, nor how much, tax is due within six months of the member’s death.

We believe the proposed process is flawed and will cause Pension Scheme Administrators (PSAs) many problems.

The timescales are over ambitious, particularly the six-month time limit immediately following death – this should be changed to the date that the PSA learns of the member’s death at the very least. It also seems unreasonable for PSAs to be liable for penalties for late payment or reporting when they depend on the deceased’s personal representatives (PRs) providing information in time – something that experience suggests cannot be relied upon.

Similarly, it is unreasonable for PSAs to be subject to interest charges for failing to report or account for an IHT charge or to be liable for a penalty for late submission in situations where they could not have known they had to make the submission or pay the tax charge. If a late payment interest charge is levied on PSAs, it may cause significant delays in the payment of benefits on death, which is likely to cause unnecessary financial hardship.

We do not agree that PSAs and beneficiaries should become jointly and severally liable for the payment of IHT twelve months after death. Once benefits are paid out any further IHT liability should rest with the beneficiary – as PSAs would no longer have assets relating to that beneficiary from which to make payment.

The information sharing requirements and surrounding processes set out in the consultation are likely to cause significant delays in the settlement process for death benefits, likely leading to beneficiaries receiving monies much later than under the current regime, with the potential for causing bereaved families significant financial hardship and additional distress.

In order to avoid some of these challenges, the Government should either look for payments to made gross of IHT with them gathering this information and approaching the PR/beneficiaries for payment of IHT or allow payments to be paid quickly with a withholding rate of IHT paid (subject to a minimum value exemption) which can be then trued up by HMRC and the PR/beneficiaries.

Finally, it is not clear whether death benefits from excepted group life schemes are exempt from the proposals – we believe they should be, but this should be clarified urgently. Similar clarity is needed in relation to death benefits from registered pension schemes that are backed by group life insurance – it is unclear if they are exempt. It will be helpful if they are, but if not, it then makes a difference what type of Trust they are operating under, be it an Insurer’s GLA Master Trust, a Standalone Trust or a Pension Scheme Trust.

Key People

Image Iain McLellan

Director

iain.mclellan@isio.com See full profile

Get in touch

Talk to us today to see how our bolder thinking can get you better results.