LCP are calling on the Government to make major changes to ensure that the new rules surrounding the inclusion of pensions in the IHT net from April 2027 are implemented “fairly and effectively”.
LCP partner Steve Webb will be giving oral evidence to the House of Lords Economic Affairs Committee later today (3 November) in its inquiry into the Finance Bill and changes to IHT.
LCP argues the inclusion of pensions in the IHT net needs to be accompanied by a range of practical changes.
One being that the justification for the policy was that DC pensions were being used by some as a vehicle to avoid IHT.
However, the scope of the policy goes far wider and includes ‘death in deferment’ lump sums from DB schemes and even small funeral grants from pension schemes; as neither of these systems are being used to avoid IHT, LCP believes it is unfair to include them in the scope of the policy.
Also, the person dealing with the estate will be liable for ensuring that IHT is paid but may not have control over some of the funds.
The new process could also lead to a delay in money being released to those in need, such as a widow or widow exempt form IHT.
LCP said under the new rules, it’s not clear assets can be paid until the whole process has been completed and the Personal Representative knows the value of all pension and non-pension assets and how these are to be split between exempt and non-exempt beneficiaries.
This means that even a payout to a spouse – where no IHT can be due – could be put on hold for months. LCP added: “It would be better if such payouts could be released before IHT matters were resolved.”
The Personal Representative also has to ensure IHT is paid within six months and beneficiaries will face the effect of interest and penalties if this is not done. Still, as LCP notes they may be penalised for matters beyond their control, such as delays in obtaining information about fund values and about other beneficiaries.
LCP believes a longer deadline should be put in place or at least waive the penalties and interest in such cases.
Additionally, due to the time pressures on the process, LCP believes more needs to be done to ensure that pension schemes are aware of the death of a member as soon as possible.
LCP advises that the Government’s ‘Tell us Once’ service share information with pension schemes and providers, saving the bereaved family from having to do this.
Also requiring registrars to share data about deaths more quickly and frequently than the currently monthly data feed.
The probate service should be streamlined as well to allow the Personal Representative to apply for probate at once and for the application to be processed in parallel with sorting out the IHT.
LCP added: “Probate can only be sought once all IHT due has been assessed and paid, and that probate itself can sometimes take months to be awarded, bereaved families could find themselves still sorting out the affairs of a loved on a year or more after the death.”
Bereaved families may have difficulties in tracking down any pensions, and this will add further to the delay in sorting out the estate.
Due to this LCP believes the pension dashboard, once live, should be made available to bereaved families and the data displayed should be expanded to include unspent pension balances.
LCP partner Alasdair Mayes said: “The rationale for this policy was to stop DC pensions being used for avoiding Inheritance Tax. But the new rules will capture other types of pension rights, including certain lump sum death benefits from DB pension schemes, where there could be no suggestion that they are being used to avoid tax.
“These types of benefit should be excluded from the changes. We also need to ensure that the new processes do not create delays in getting pension money to bereaved families. If the policy has to go ahead, much more thought needs to be given to minimising the impact on both grieving families and on pension schemes.”
LCP Partner Steve Webb added: “The new regime will create a lot more work both for Personal Representatives dealing with estates and for pension schemes and providers. This is already a difficult time for families, and they will now face a ticking clock of six months before interest and penalties could apply if IHT is not sorted out.
“This deadline needs to be extended, otherwise people will be punished for something which may well not be their fault. Personal Representatives should also not be held accountable for the IHT on pensions paid out to another beneficiary, as this is money they have no access to.”
