Stubborn Government to pile admin misery on grieving families

As we were packing up our lilo and suncream, ready for the summer holidays, HMRC finally came back with some clarification on how unused pensions will be taxed on death.

Put simply, it is ploughing ahead with plans to extend inheritance tax (IHT) to pensions. This is despite overwhelming industry feedback saying this is unworkable in practice.

This is an incredibly disappointing response from senior government policymakers. There are far easier and simpler ways of taxing unused pensions. To stick to the one that will cause the most administrative misery and frustration – and incur additional costs – for families coping with the loss of a loved one is a very strange decision for government to take.

The key change to the new proposals is that some of the responsibility the pension scheme administrators (PSA) were going to be given to report and pay the IHT due is going to be given instead to the personal representatives (PR).

This is not lessening this burden – it is simply moving it and making it someone else’s problem. In this case, the ‘someone’ being the most vulnerable party, who will have a short time to get to grips with how both inheritance tax and pensions work.

It also creates a weird triangular relationship between the PSA, PR and beneficiary. In many cases the PRs will also be the main beneficiary of both the estate and of the pension. But that’s far from being a ‘gimme’. Pension beneficiaries could be unrelated – and, in some cases, even unknown – to the PR. Even when each party knows one another, there is no guarantee they get on!

However, the PR cannot ask the pension scheme to sort this – the pension scheme can only take their instructions from the beneficiary and not the PR. You can see how this could easily escalate into messiness.

The main issues with the new proposals are broadly the same as they were six months ago. First, the trustees’ discretionary process to identify beneficiaries works at a different unrelated level to the estate administration, with its own issues and timescales. Second, the pension assets are not always easy to work with, for example they could be illiquid. Third, there may be multiples of pension schemes and multiple beneficiaries which threaten to hold up the process.

All this is underwritten by short and – in some cases – quite frankly impossible timescales. If these are missed, late payment interest starts building up at 4% above base rate.

Up to now advisers may have been focusing on the practical implications of extracting ‘excess’ funds from pension schemes, whether by spending it, gifting it to others (using IHT allowances) or protecting it under other trusts.

Advisers may now want to add to that list working with their clients and professional connections to make sure they are ‘IHT pension ready’. For example, by making sure that wills and expressions of wishes are up to date, that pension beneficiaries are carefully chosen to make the process as easy as possible, and that all pension plans are located and possibly consolidated to cause the least angst to those left behind to administer the estate.

I am still staggered that policymakers have shown so little humanity in their choice of solution, given that there are viable alternatives that will achieve the same policy and financial asks.

Meshing pensions and IHT together cannot be done, certainly not easily or cleanly. Is it too late for government to show some compassion? Not until the ink is dry on the legislation, but it’s looking increasingly unlikely.