Inheritance tax pension reforms will delay payments to grieving families and the taxman

The government is pressing ahead with plans to charge inheritance tax on pensions but there are warnings that it will be harder for executors to administer an estate and pay HMRC

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(Image credit: Getty Images/Guido Mieth)

The government’s inheritance tax (IHT) reforms for pensions will deter professionals from helping to administer estates and ultimately delay money going to grieving families and the taxman, experts have warned.

The House of Lords has heard from tax experts about the risks of the government’s plans to bring pensions into an estate for IHT from April 2027.

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The government's IHT pension reforms explained

Currently, the Finance Bill proposes that a pension will count towards the value of an estate for IHT from April 2027.

This creates plenty of financial planning challenges but also will make it harder for people tasked with administering an estate and ensuring beneficiaries get money or assets that have been left to them.

Under the changes, a personal representatives typically the administrator or executor of an estate, will be responsible for collecting information on pension values to pay any inheritance tax owed.

Personal representatives have always been responsible for valuing an estate and ensuring any owed inheritance tax is owed.

But the House of Lords inquiry has heard warnings that including pensions in an estate raises new complications.

The six-month IHT rule

Currently, any inheritance tax owed on an estate must be paid within six months of the person dying or there will be charges of 8% on the money owed.

Ian Bond, member of the wills and equity committee at the Law Society, said that timetable is already short before you have to factor in finding pension information.

He said: “People rarely die tidily and things are not always in the best of order

“Many don’t just have one pension and the onus is on personal representatives to find them.

“The IHT clock starts ticking as soon as as someone dies. Interest rates will apply if IHT isn’t paid six months after death. That is short as it is but layering pensions on top of that makes it incredibly difficult.

“The government proposals for pension schemes sharing information are welcome but there is no detail on what administrators are gong to provide to us.”

"It needs to be standardised and frailty sharpish so we don’t end up delaying the administration of estates.”

Inheritance delays for families

There are also warnings that advisers to executors could be reluctant to allow money to be distributed due to uncertainty on pension valuations and over reliefs such as if money is going to a spouse.

There may also be conflicts where an executor is acting for beneficiaries of an estate that may be different to the beneficiary of a pension.

John McArthur, a partner at the law firm Gillespie Macandrew, who is a member of the Society of Trust and Estate Practitioners, said this could make it “almost impossible to complete an estate.”

He said advisers to executors will want to be clear that there is no more inheritance tax liability, which can cause delays and make it harder fir beneficiaries who are already going through the grieving process.

John Bunker, consultant solicitor and chartered tax adviser at Irwin Mitchell, representing the Chartered Institute of Taxation, added that professional representatives may be deterred from the industry due to fears of incorrect valuations, which means families could miss out on advice and ultimately assets that could be owed to them.

Similarly, Bond warned that profession representatives may not want to be liable for inheritance tax on pensions, which is an asset they don’t control.

Delays for the taxman

Without a market for professional representatives, Bunker warns that there will be delays in estates getting resolved and ultimately tax being paid.

He said: “HMRC will will end up with loss of tax revenue.

“There will be delays in getting tax and HMRC will need to deal with laypeople or solicitors were there is no professional to act as executor.

“All those things create problems.”

Possible solutions raised during the hearing included extending the six month deadline, allowing 50% of the pension to be retained while tax calculations are made and cutting the interest rate charged on late payments of IHT.

But it is unclear if the government will listen in time before April 2027.

Marc Shoffman
Contributing editor

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and the i newspaper. He also co-presents the In For A Penny financial planning podcast.