Double inheritance tax payment window for pensions and family businesses, Lords tell government

The government’s incoming pensions inheritance tax rules will place a “huge burden” on those left to pay the bill, a new report from a group of Lords has said. It is calling on the government to double how long families have to settle inheritance tax (IHT) bills in cases where pensions, family businesses and farms are involved, from six months to a year.

Peers on the House of Lords Economic Affairs Finance Bill Sub-Committee scrutinised measures relating to inheritance tax and unused pension funds – which will be subject to IHT from April 2027 – as well as reforms to agricultural and business property reliefs (APR and BPR).

One of the most significant issues raised during the committee’s inquiry is the administrative and potentially financial burden that will be placed on personal representatives – typically the administrator or executor of an estate, often a family member, sometimes in conjunction with a solicitor – by the measure to include unused pension funds in inheritance tax calculations. In many cases, the deadline to pay the inheritance tax bill will be too short for the timescales on which existing pensions processes operate, the committee's report said.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

It was “not realistic” to expect personal representatives to be able to meet the statutory six-month deadline for payment of inheritance tax in relation to pension assets, it added. Many personal representatives will be at risk of finding themselves subject to late payment interest, it said, adding: “It cannot be right to impose on taxpayers a timescale for payment of tax if that timescale is for many likely impossible to meet.”

The planned rules could mean personal representatives become liable for inheritance tax on assets they can’t access or control, the report said, creating cashflow issues as well as deterring people – professionals and lay people alike – from taking on the role.

Steve Webb, former pension minister and now partner at pension consultancy LCP, told the MoneyWeek podcast he fears the burden of ‘sadmin’ – sad admin after someone has died – will become ever worse once the new rules come in from April 2027.

“Sadmin is the whole hassle of someone’s died and you now have to deal with all the paperwork. Once pensions are in [subject to IHT], the hassle, the admin the delay that is going to cause is just going to be misery for people who may at the end of all that, not have to pay any inheritance tax.”

A statutory “safe harbour” from late payment interest for personal representatives should be introduced, the committee argued, where they can evidence that they took reasonable steps to try to meet those deadlines, but couldn’t due to reasons outside their control. For example, having to wait for the pension company.

The six-month inheritance tax payment deadline should also be extended to 12 months for IHT on pension assets for a transitional period, so personal representatives have a “more realistic timeframe” in which to pay the IHT bill while pension scheme administrators update their processes, the report added.

In relation to the APR and BPR reforms, the committee concluded dealing with estates is “likely to become more complex”, given the increased significance of valuations and the deadlines for paying any IHT due. Issues with being unable to pay on time within the six-month window were flagged repeatedly in evidence given to the Lords’ committee, particularly for small businesses and farms that may be asset-rich but cash-poor, even where payment by instalments is available.

The committee also heard that the reforms risk creating a generational divide, as while younger farmers and business owners should have time to take steps to mitigate the impact of the reforms, the options for older owners are more limited, particularly given the measures restricting the use of existing lifetime gifting rules.

The committee recommends the government also extend the deadline to 12 months for estates with qualifying APR and BPR assets in order to address the liquidity problems many of these estates will face.

Lord Liddle, chair of the Finance Bill Sub-Committee, said: “We are particularly concerned about the impact these changes will have on personal representatives administering an estate at a time of grief. The practical issues created by bringing pensions into inheritance tax risk causing significant delays and costs. Moreover, many of those affected may be entirely unaware of how these changes will impact them.”

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 representative, 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 paid.

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 regarding pension valuations and 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 for 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 professional 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 end up with loss of tax revenue.

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

“All those things create problems.”

Some possible solutions, as well as extending the six month deadline, include 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.

Steve Webb: Using pensions for property | MoneyWeek Talks - YouTube

Watch On