Early Autumn saw the Government finally publish its long awaited draft legislation for the treatment of inheritance tax on unused pension funds and death benefits which will come into effect in April 2027. The draft rules include:

From April 2027, unused pension funds and pension death benefits will be included in the member’s estate on their death regardless of whether the scheme trustees have discretion over the payment of any death benefits.  The exemption for death benefits passing to a spouse or civil partner or to registered charities remains.  The following pension funds and death benefits are also excluded:

• All death in service benefits payable (whether from a discretionary or non discretionary scheme)
• Dependant’s scheme pensions from defined benefits schemes/collective money purchase schemes;
• Small scheme pensions commuted to a lump sum;
• Dependent/beneficiary annuity payments;*
• Business and agricultural assets held in pensions will not qualify for Business Relief or Agricultural Relief;

*Guarantee payments and value protection paid during an annuity guaranteed period, will be included in an estate.

Following the consultation around reporting and paying of inheritance tax relating to pension funds, it was confirmed that it will be the responsibility of the Personal Representatives (PRs) rather than the scheme administrators, to report and pay any IHT due.  They will need to work together with pension scheme administrators to obtain the information needed and to calculate the amount of tax that relates to each pension scheme.

The options for payment are:

There are three options for the tax to be paid:

• The whole of the IHT liability can be paid from the free estate, if there are sufficient funds. This is only likely to be suitable if the beneficiaries of the free estate and the pension are the same.
• The pension beneficiaries can instruct the pension scheme administrator to pay the tax directly to HMRC (see below for further detail);
• The pension beneficiaries can take their share of the pension fund in full and pay the tax directly to HMRC. This option would see the fund subject to income tax on withdrawal so the beneficiary would then have to claim a refund from HMRC in relation to the income tax paid on the portion relating to the IHT.

If they expect tax to be owed, PRs can instruct pension scheme administrators to:

• Withhold up to 50% of the taxable benefits for a maximum of 15 months from the date of death.
• Pay the owing Inheritance Tax to HMRC before releasing the remaining benefits to beneficiaries.

If these instructions are withdrawn or the 15-month period ends, the withheld funds can then be distributed.

Where this takes place, it will impact pension scheme beneficiaries who will be able to access up to 50% of the deceased’s pension death benefits, for up to 15 months after the date of death. This delay is to ensure that enough money is held back to cover any potential IHT liability and provides some reassurance to PRs to meet their responsibilities.

These rules do not apply to:

• exempt benefits
• funds under £1,000
• continuing annuities

Additionally, Prs will no longer be liable for taxes on pensions discovered after HMRC clearance has been granted, provided they made every effort to locate the deceased’s pensions schemes during the course of the administration period.

HMRC will be providing personal representatives, pension scheme administrators and beneficiaries with clear guidance, an Inheritance Tax Checker Tool, and a system to pay the tax liability.

Future Planning

Retirement income planning and inheritance tax are still inextricably linked, only now the options to reduce the potential tax charge are very different.

When speaking to clients regarding estate planning, considerations around affordability to make gifts and transfer assets to the next generation are now being discussed along with the option of taking life insurance to provide a lump sum to pay towards the tax charge.

Simplification of the number of pensions that are in place may be helpful and the careful review of expressions of wish, nominating beneficiaries in the most suitable way.  Using discretionary trusts could also be an option in some situations, particularly where death occurs before age 75.

We are working closely with our professional contacts to support their clients that need advice now on their pensions and revising retirement income plans accordingly.

Contact us on 0330 320 9280, email info@cravenstreetwealth.com or complete our online enquiry form.

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.

 References to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of publication. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.

 You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.

Craven Street Financial Planning Limited is authorised and regulated by the Financial Conduct Authority (FCA). The FCA does not regulate tax advice.