Requiring pension scheme administrators and trustees to take responsibility for inheritance tax payments could cause problems, according to the SPP - and there are viable alternatives.
The government announced plans in October as part of its first Budget to impose inheritance tax on unused pension funds and death benefits from April 2027.
Following the announcement, Quantum consultant Sarah Garnish said that the inclusion of DC pensions within inheritance tax “somewhat restores the principle that pensions should not be a vehicle for the accumulation of capital sums for the purposes of inheritance”.
“However, 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.”
David Brooks, Broadstone
“It is understandable that the government is reforming the inheritance tax regime to ensure pensions are used for their primary purpose of providing income in retirement rather than enabling wealth transfer,” said Broadstone head of policy David Brooks this week.
“However, 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.
“Tightening this regulation will create an inheritance tax framework that ensures tax reforms are born by those with the broadest shoulders without unnecessarily penalising pension savers and their families in emotional and stressful circumstances.”
‘Continue using existing payment methods’
HM Revenue & Customs (HMRC) has since consulted on making scheme administrators - typically trustees – responsible for reporting and paying this inheritance tax.
HMRC argues that there are several advantages to shifting this obligation from personal representatives, observing that the latter are often unable to access pension scheme funds to settle the inheritance tax that is attributable to those funds.
Paying inheritance tax directly out of scheme funds before they are handed to a beneficiary avoids a scenario where the personal representatives are unable to access sufficient funds to pay the requisite inheritance tax, HMRC says.
The SPP, however, has described the idea as “very problematic”, arguing that it “does not seem fair or reasonable” that administrators will be subject to interest charges for failing to report and account for an inheritance tax charge.
The society has set out two alternatives that it says would be “less costly, quicker, and ultimately more effective”.
The first is to continue using existing payment methods, while the second is to tax benefits at the 40% or the applicable rate, and “paid promptly in the minority of cases where a pension is subject to inheritance tax”.
Observing that this would not apply in most scenarios – where the spouse is the beneficiary, for example – the SPP said that “the impact could be further moderated by being subject to a de minimis provision and an option for the personal representative to voluntarily certify to the administrator that no tax is payable on the proportion of the estate represented by the pension scheme”.
“This means HMRC gets its tax quicker, and beneficiaries get their money quicker – a genuine win-win solution,” the society said.
