Some of the obligations on administrators proposed as part of taxing pensions on death from April 2027 are “unreasonable and not appropriate”, the Association of Professional Pension Trustees has said, while the Association of Consulting Actuaries calls for a separate pensions inheritance tax regime. A technical consultation on pensions and IHT closes today.

At the end of October last year, the chancellor announced that pensions would come into scope for inheritance tax. At the same time, HM Revenue and Customs issued a technical consultation on how to implement this – and clarified that it will apply both to money purchase pots and defined benefit lump sums. IHT is due for estates exceeding £325,000. Further exemptions apply where a home is owned – £175,000 until 2026 – and where spouses have passed on their tax-free allowances, giving an allowance of up to £1m.
 

 

The pensions industry was not against the introduction of IHT on pensions – there has been some unease about defined contribution schemes being used by the wealthy to avoid IHT rather than for pension income.

However, there are now concerns around HMRC’s proposal to make pension scheme administrators liable for reporting and paying any inheritance tax due, and about levying interest if tax is not paid within six months.

The APPT is calling for the provisions “to be as streamlined as possible and to operate to timescales that are both realistic and sympathetic to those affected”. 

APPT chair Rachel Croft said the proposals place “a very significant burden” on pension scheme administrators generally and third-party administrators in particular, at a time when they are already under strain from separate reforms. Administrators have been dealing with guaranteed minimum pension equalisation and the McCloud remedy in the public sector among others.

The impact will be felt most harshly by smaller schemes and smaller employers, “adding further costs and anti-growth administrative obligations upon them”, said Croft.

She called some of the proposed obligations on administrators “unreasonable and not appropriate”.

The Association of Consulting Actuaries even suggests there should be a separate IHT regime for pensions.  

Kirsty Cotton, who chairs the ACA Pensions Taxation Committee, called for “clearer and better exemptions and processes” for dependants and small pension pots. 

 

She said there were many practical concerns with making administrators become responsible for paying a share of IHT determined by the personal representatives.

“Instead of attempting to integrate pension schemes into the IHT process, a simpler approach is required recognising that pension assets are fundamentally different from other financial assets,” she said. 

 

The ACA is also critical of the six-month timeline for paying IHT, pointing to delays in notification where the deceased left employment many years ago and trustees needing time to gather sufficient information to make discretionary decisions where nominations are out of date. 

Others are concerned about defined benefit and death in service lump sums. Consultancy Broadstone said death lump sums from DB schemes should be exempt from IHT as they are not intended for wealth transfer.

Death in service lump sums, which can also be paid to DC members’ relatives, "are there to help next of kin at the worst possible time with the benefit put in place to help the family deal with the tragic loss of a loved one rather than for wealth management purposes”, said Broadstone. These too should therefore be exempt, the consultancy argues. The consultation currently appears to suggest that some lump sums will be exempt if paid by an insurer, as it states that life policies are not in scope for the changes.

Broadstone’s head of policy David Brooks said: “We believe there are a few elements of the proposals that could be loosened, particularly where the primary purpose of lump sum payments is not for estate management.”

He also highlighted that the changes would penalise unmarried couples, since only spouses are exempt from IHT. 

“We would urge the government to consider updating the IHT tax system for the living circumstances of society,” Brooks said.

The Society of Pension Professionals said the proposals in their current form will create “many problems”, including the potential for delays in paying out benefits, causing unnecessary financial hardship to some beneficiaries.

The SPP thinks the proposals are unclear on what is in scope, impose “unrealistic and impractical” timescales, and apply interest charges or penalties on administrators for “delays over which they have little or no control”. Administrators will need to wait for representatives to tell them whether inheritance tax is due based on the remaining estate. 

Instead, the society proposes to either leave the calculation and payment of IHT to the estate’s personal representative and HMRC, or alternatively, to require administrators to tax the benefit in full and pay it promptly, potentially with a new de minimis limit, and by an option for the PR to voluntarily certify to the PSA that no IHT is payable.

The first proposal is unlikely to be picked up, as HMRC highlights the risks if a personal representative cannot access the pension pot from which the tax is due, and funds have to be drawn down – incurring income tax – before inheritance tax can be paid. 

On the second proposal, the SPP argues this would mean that “HMRC gets its tax quicker, and beneficiaries get their money quicker – a genuine win-win solution”. 

Steve Hitchiner, chair of the SPP Tax Group, said: “The current proposals will result in numerous problems and challenges which could be largely avoided by adopting either of the SPP’s recommended alternatives.”