The House of Lords is to scrutinise controversial plans to include pensions in inheritance tax (IHT) calculations from April 2027.
The Lords’ Finance Bill Sub-Committee today (17 September) launched a call for evidence to consider the government proposals.
The Lords are inviting responses on how the reforms will work in practice, as well as whether the government has sufficiently taken into account the impact of the reforms on personal representatives and pension schemes.
The plans, which have been met with widespread criticism since they were first announced in the Autumn Budget last year, mean any unspent pension assets on death will be treated as part of the individual’s estate.
Once passed to the beneficiary, income withdrawn from the pension may then also be subject to income tax at their own marginal rate, depending on the age of the member when they died.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.
The government’s technical consultation on the proposals closed in January and in July, HMRC published draft legislation, confirming it plans to go ahead with the plan.
However, it confirmed one fundamental change: 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.
However, AJ Bell, which has regularly voiced its disapproval of the IHT on pensions plan, claims this will still create complexity and confusion.
The firm’s head of public policy, Rachel Vahey, added: “Despite a deluge of criticism of their original proposals, the government stubbornly decided to press ahead, changing the detail to push the responsibility of calculating and paying IHT firmly on the shoulders of personal representatives.
“But it quickly became apparent the new proposals didn’t resolve any of the complexity; instead, they merely create new problems for bereaved families.
“Hopefully the Lords will be able to see what effect this will have and ask the government to change direction. Bereaved families will 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.
“But it’s not too late. Ministers still have time to see that these proposals are not the best way to achieve their objectives.”
Vahey said there are alternative solutions to taxing pensions on death that won’t cause the administrative frustration, delays in payment and concerns for bereaved families that the current set of proposals threaten to, while still raising the same amount.
She believes income tax applied on withdrawals at the marginal rate of the beneficiary would be a far simpler alternative.
It 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.
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.
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.
