STEP, the professional body for trust and estate practitioners, has warned the government that its plans to bring unused pension funds within the IHT net from next April will cause “unworkable complexity” and could have adverse consequences for bereaved families.
It has called on the government to simplify the planned inheritance tax on pensions and do more to protect bereaved families.
In its response to a HMRC technical update on inheritance tax on pensions, the 22,000-member body said it welcomes some improvements to the plans but warns that overall they will bring unworkable complexity, unfair interest charges and the ignoring of existing, proven methods for paying IHT.
STEP says it will continue to press the government to simplify its proposed changes to how inheritance tax (IHT) is applied to pensions.
From next April, most unused pension funds and pension death benefits will be included in the value of a deceased person’s estate for IHT purposes. These rules apply only to pension death benefits and do not extend to death-in-service schemes.
STEP says in its response that the proposed framework remains, “fundamentally flawed, overly complicated, and heavily skewed” toward the perspective of pension scheme administrators (PSAs).
STEP has warned that the complexity on IHT rules could lead to:
• significant probate delays
• deter people from acting as executors
• increase costs and
• create unintended tax consequences for grieving families and legal risks for those managing a deceased person’s estate – potentially causing estate beneficiaries to inherit less than the deceased intended.
STEP has put forward recommendations and is calling for an alternative framework.
Emily Deane, STEP’s technical counsel and head of government affairs, said: "The government has made genuine progress in addressing some of the industry’s initial concerns, and the additional detail provided in its recent technical note is helpful.
“However, these changes significantly increase the burden on executors who are navigating the loss of a loved one. At what is already a difficult time, individuals may be expected to track down multiple pension arrangements, engage with providers before probate, and deal with complex and evolving tax requirements. What is needed is a fair system that works for all parties involved, and without simplifications, there is a real risk of delays, higher costs and growing reluctance to take on the executor role.’
Ian Bond, member of STEP’s UK technical committee and head of legal at Dignity Legal Services said: “The government must simplify the IHT on pensions framework so tax can be paid fairly and practically from pension funds themselves, rather than leaving executors and bereaved families to manage complex liabilities on assets they may not control. What is needed is a process that ordinary executors can actually use in real life, not just one that works on paper.”
• STEP’s comments on HMRC’s technical note and STEP consultation response: Inheritance tax on pensions information sharing regulations.