Will the Inheritance tax reforms in the budget affect pensions in probate?
HMRC released the following on their site on 30th Oct ‘Autumn Budget 2024: the government announced several measures to reform Inheritance Tax. This included a measure to bring most unused pension funds and death benefits within the value of a person’s estate for Inheritance Tax purposes from 6 April 2027. As part of these changes, pension scheme administrators (PSAs) will become liable for reporting and paying any Inheritance Tax due on unused pension funds and death benefits.’ Read the full briefing here.
According to the Government, pensions have been somewhat protected from direct taxation to encourage saving for later life, however the treasury has cited it as one of the most expensive reliefs in the UK tax system, with gross tax and NICS relief costing £70.6 billion in 2022 to 2023.
What changes did the Chancellor make?
The new rules applied by the Chancellor in this week’s budget attempt to challenge pensions being used as a vehicle to mitigate IHT and pass on wealth, by bringing them inside the estate. Non-discretionary pensions (such as NHS or judicial schemes) are treated as part of an individual’s estate, however most UK pensions are ‘discretionary’ schemes and unused funds fall outside that person’s estate, meaning they can be passed on and avoid IHT.
What has changed?
From April 2027 any unused funds will be included in the deceased’s estate and be liable for IHT. The complicated part is who is doing the calculations and paying the monies owed? The beneficiaries of the estate? The Pension Provider? The IFA? The Executors of the Will?
HMRC are currently suggesting that the PSAs will be liable for both reporting and paying the IHT on unused pensions, differing from the current situation of Pension Representatives/Executors being responsible. How this will happen on a practical level is still under review.
How will this work in practice?
HMRC are undertaking a consultation period inviting key stakeholders to comment on best practice, potential pitfalls and ensuring the transition is as smooth as possible. These consultations are quite common with new practice and should enable the industry to have their say in how this new approach will work in practice.
There are already really concerns as to how this will work in practice. For instance, will there be liquidity challenges for the PR/Executors if they don’t have access to the pension funds directly? There will need to be solid lines of communication between the PR/Executors and the scheme providers to ensure the calculations are timely and accurate.
Points of note
- Will the beneficiary be liable to pay income tax on any draw-downs on the pension to reimburse the PR/Executors for IHT paid?
- If the PSA misses the 6 month deadline, they will be charged late payment interest on the amount of IHT for which they are liable
Paying IHT directly from the pension through the PSA would mitigate these issues. HMRC are also planning on providing a new calculator for PR/Executors to work out the portion of the nil-rate band which applies to the unused pension funds. They will then be required to use a new form to notify the PSA of the nil-rate band and the IHT reference number.
These changes are complex and have many stakeholders involved, with the implications for end-users are currently unclear. However, it may cause many people to re-think their own pensions or look at alternative ways to pass on wealth, not to mention causing possible delays to the probate process with the added administrative load. If you would like to discuss your own situation with our Private Client team, please contact us on the below details.
Tim Crook is our Head of Private Client
Email: privateclient@ocglegal.co.uk
Tel: 0204 553 2855
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