There is a lot of noise surrounding Inheritance Tax on Pensions, which is understably causing concern. We received information on this subject as seen below;
The government’s latest proposals to bring unused pensions into inheritance tax (IHT) have just closed for consultation. While the desire to tax pension funds passed on after death is understandable in today’s economic climate, the way it’s being done risks creating confusion, delays and unfair outcomes for families.
As Andrew Tully recently highlighted, using IHT to capture tax on pensions “defies logic.” It also runs counter to the government’s own aims of modernising tax collection and making it more efficient.
A Complex and Burdensome Approach
Under the draft legislation, personal representatives (PRs) – often family members of the deceased – will be responsible for reporting pension benefits for IHT purposes. Originally, this duty was meant to sit with pension scheme administrators (PSAs), but was changed due to the obvious practical and administrative difficulties.
However, handing this job to PRs doesn’t make things simpler. Many PRs are not familiar with IHT rules or pension regulations. They’re likely to be vulnerable customers themselves, having just lost a loved one, and are not best placed to manage complex reporting requirements.
The result? Delays, confusion and potentially costly mistakes. For example:
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Conflicting timelines: Pension schemes have up to two years to identify and pay beneficiaries, but probate needs to be completed within six months. This mismatch could force PRs to hold back on filing IHT accounts for fear of penalties, triggering late-payment interest charges.
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Multiple pensions: Where more than one pension exists, the whole estate moves at the pace of the slowest scheme. PRs will need complete beneficiary information before they can calculate the IHT bill.
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Fairness issues: If pension beneficiaries differ from the free estate beneficiaries (common in blended families), PRs may have to “go after” the pension recipients to recover their share of tax.
Unnecessary Work for HMRC
This convoluted process also creates significant rework for HMRC. If additional assets are discovered later, or valuations are revised, all calculations—including those for pensions—must be redone. That means refunds, further payments and new late-interest charges, adding to the administrative burden for both HMRC and families.
Simpler Alternatives Exist
What makes this even more frustrating is that better options are available. Taxing inherited pensions via income tax or a straightforward one-off “death tax” would be easier to administer and quicker to collect. Existing systems could be used, payments to beneficiaries would be faster, and PRs wouldn’t have to get involved with pensions at all.
Clear Finance’s View
We understand the government’s need to raise revenue. But the current approach of using IHT to tax pensions is unnecessarily complicated and risks creating poor outcomes for families at an already difficult time. A simpler, more transparent mechanism would benefit everyone: HMRC, personal representatives and pension beneficiaries alike.
At Clear Finance, we’ll continue to monitor developments closely. If you’re concerned about how these changes might affect your estate planning or your pension arrangements, our team is here to help.
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