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

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Pension advisers and wealth administration chiefs have urged the Treasury to rethink plans for easy methods to apply inheritance tax to pension funds, warning that present proposals may result in extreme delays and elevated prices for the bereaved, even in circumstances the place no inheritance tax is due. 

In her Funds final autumn, chancellor Rachel Reeves introduced that pension funds would develop into a part of inherited estates by April 2027, a transfer set to upset tax planning by rich folks however increase £1.5bn a 12 months for the Treasury by 2030. 

The federal government estimates its proposals will result in 1.5 per cent extra estates throughout the scope of demise duties in 2027-28, on high of the 4 per cent that already exceed the £325,000 nil-rate band, which might rise to £500,00 the place a property is handed on. 

However considerations have been raised by tax and pension professionals about potential dangerous results in consultations on the technical particulars of the federal government proposals that shut on Wednesday.

The Society Of Pension Professionals, a commerce affiliation, warned the federal government’s plans “impose unrealistic and impractical timescales” whereas making use of curiosity fees or penalties on pension scheme directors for delays “over which they’ve little or no management”.

The chief executives of a number of the UK’s largest wealth managers, together with Interactive Investor, Quilter and AJ Bell, have additionally written to the chancellor over the “flawed and probably damaging” proposals, calling on the federal government to “work with the pensions trade to agree an easier methodology of reaching the coverage intention”.

The letter, seen by the Monetary Occasions, stated: “The complexity of the proposed method, specifically bringing all pensions into estates for IHT, will result in substantial delays paying cash to beneficiaries on demise and trigger misery for bereaved households.”

Beneath the proposals, private representatives of inherited pension funds could be accountable for figuring out the funds and calculating how a lot if any IHT is owed, considering different property within the property. The pension scheme administrator would then be accountable for paying the inheritance tax earlier than releasing the funds.

Consultants say this might trigger delays in payouts, together with to these not chargeable for the tax. Beneath present guidelines, inherited pensions may be paid extra rapidly to beneficiaries and used to pay for probate prices, funeral fees and different pressing payments.  

“The (new) course of is difficult and it’ll punish decrease earners,” stated Anna Rogers, senior companion at Arc Pensions Legislation. “Rich folks don’t want the cash rapidly . . . it appears the hurt might be disproportionately to those that aren’t rich and those that die younger.”

Attorneys are additionally involved that the six-month window between demise and the deadline for fee of inheritance tax doesn’t go away sufficient time for pension funds to be recognized and the tax to be calculated, leaving people weak to late fee fees. 

“Pension scheme guidelines permit two years to pay demise advantages . . . there could also be a must promote property to pay the tax, however there is perhaps circumstances of individuals not with the ability to pay, for instance if a property must be bought,” stated Jeremy Harris, companion at Fieldfisher.   

The SPP has urged the federal government to both go away the calculation and fee of IHT to the pension’s private consultant and HM Income & Customs — or for the profit to be taxed in full at 40 per cent and paid promptly by the scheme administrator within the minority of circumstances the place a pension is topic to IHT. 

Steve Hitchiner, chair of the SPP, stated points regarding the reporting and fee of inheritance tax on pensions was “vitally vital” and the present proposals “will lead to quite a few issues and challenges which may very well be largely prevented”.

Some demise in service advantages, designed to supply monetary safety for somebody’s dependants in the event that they die unexpectedly younger, may additionally face a big inheritance tax invoice, in circumstances the place they’re arrange as a part of the registered pension scheme.

“It’s obtained the potential to be fairly a large number . . . sooner or later there might be a backlash,” Harris stated.

Kate Smith, head of public affairs at Aegon, added that there’s a lack of readability over what’s in scope and that “no person thinks [the proposals] will work”.

The Treasury stated: “We proceed to incentivise pensions financial savings for his or her supposed goal of funding retirement as a substitute of them being overtly used as a car to switch wealth.”