A House of Lords committee has been highly critical of the government’s proposals on inheritance tax (IHT) and pensions.
Cynics might expect members of the House of Lords to have more than a passing interest in the Chancellor’s plans to bring unused pension funds within the scope of IHT. Whether or not that view is fair, a House of Lords Economic Affairs sub-committee has been examining the relevant legislation contained in the current Finance Bill. Their Lordships were not impressed, noting that “…significant work remains to ensure that these measures work in practice for personal representatives”.
In a report published at the end of January, the sub-committee made an extensive list of recommendations, including:
- The six-month IHT payment deadline for personal representatives (PRs) should be extended to 12 months for tax on pension assets for a transitional period, while pension scheme administrators update their processes.
- Unless the final regulations and related guidance that cover sharing of information between administrators and personal representatives are available by April 2026, “it is not sensible or appropriate to bring the changes into effect in April 2027”.
- More work needs to be undertaken to help executors find pensions belonging to the deceased. As the report notes, the sub-committee was told that “identifying pension assets is already challenging in life…There is no reason to presume that identifying all pension assets will be any easier for PRs on death”. As currently designed, the long-promised Pensions Dashboard will not give access to PRs, nor will it initially include any pensions that have been placed into income drawdown.
- The sub-committee observed that “there appears to be a low level of awareness of the change to the IHT treatment of pensions” and called on the government to launch an awareness campaign “with links to possible sources of further information to help individuals make informed decisions about their future arrangements”.
- The treatment of dependants’ pensions varies between different types of pension scheme in a way which the sub-committee saw as going “beyond the stated objective of stopping the use of pensions for tax planning”.
If you have any pension plan, ahead of April 2027, you should seek advice about how it could affect your estate planning. After the embarrassing late U-turn on IHT agricultural relief, the government will be reluctant to make any similar changes to pensions and IHT.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
