Rachel Vahey: This tweak to the process will give personal representatives a little bit of flexibility
Budget inheritance tax (IHT) modifications are welcome but powers for executors to block payments could cause unnecessary delays, LCP says.
The consultant said that, in papers released yesterday evening (26 November) on the back of the Budget, HM Revenue & Customs (HMRC) announced changes to how inheritance tax (IHT) will apply to unused pension funds and death benefits from April 2027.
LCP partner Alasdair Mayes said the changes would modify how the proposed new IHT regime would work so that those administering the estate can direct a pension scheme to pay any IHT due to HMRC direct – something he said would make the process "much more efficient".
He said: "It's a big improvement from what was announced in July which left the pension scheme stuck in the middle between the executor and all the beneficiaries."
Mayes said limiting the executor's liabilities if pension benefits are found after the IHT account has been closed would also be welcome news for executors.
But he said he believed the new ability for an executor to block payment of 50% of pension benefits for up to 15 months where they have reason to believe IHT might be due is "excessive".
Mayes said: "IHT needs to be paid within six months of death. I see no reason for executors to be able to block payments for more than six months.
"If those administering an estate think IHT is due, they should be encouraged to let a pension scheme get on and pay the tax and the residual benefit to the beneficiaries. What's been announced could result in material delays in pension schemes being able to pay benefits, as well as beneficiaries incurring penalties for late payment of tax."
A better solution
AJ Bell head of public policy Rachel Vahey said the amendments would allow personal representatives to intervene to ask pension schemes to retain half the pension fund, and not pay it out to the beneficiary, for up to 15 months and pay the IHT due in certain circumstances.
She said: "This tweak to the process will give personal representatives a little bit of flexibility. Some would have been worried that only allowing the pension beneficiary to direct the payment of inheritance tax due on the pension would lead some personal representatives on a merry dance trying to reclaim the money if the pension beneficiary withdrew all the funds."
Despite welcoming the modifications, Vahey said the latest move by HMRC did not "get away from the hard cold truth" that bringing pensions into the net of IHT is going to lead to some "administrative nightmares" for those responsible for winding up the affairs of loved ones.
She said: "A better solution would have been to find a completely different way of taxing pension benefits on death – something most of the pension industry have spent the last year urging HMRC to do.
"It's disappointing that HMRC has stubbornly chosen again to stick with the hard administrative path, rather than thinking about the grieving families who will sadly get caught up in this administrative torment at the time they are most vulnerable."
