The chancellor, Rachel Reeves, announced at the Budget last October that some pensions will be liable to inheritance tax upon death from April 2027.
The CEOs of four of the UK’s biggest providers have written to the chancellor urging her to rethink the government’s ‘flawed and damaging’ policy of levying inheritance tax (IHT) on pensions from 2027, Citywire New Model Adviser understands.
The CEOs of AJ Bell, Quilter, Hargreaves Lansdown and Interactive Investor have all signed a letter urging Rachel Reeves to reconsider her plans, or else some taxpayers will face ‘draconian’ charges in light of the policy.
At the October Budget, Reeves announced that from April 2027 any unused pension funds upon death would be included within the value of the deceased’s estate should the person die after the age of 75.
Providers have so far identified what they believe to be significant gaps in the government’s plans, including the time frame for reporting the death to when the scheme must pay the IHT due – currently set at six months.
Currently, pensions and other death benefits are passed on without IHT to the individual’s beneficiaries. The government is consulting on how it will go about implementing these changes, with the consultation closing today.
The letter reads: ‘We write to you as CEOs of AJ Bell, Hargreaves Lansdown, Interactive Investor, and Quilter to express our collective concern about the negative impact proposals to apply IHT to undrawn pensions will have on families and beneficiaries.’
Providers have so far identified what they believe to be significant gaps in the government’s plans, including the time frame for reporting the death to when the scheme must pay the IHT due – currently set at six months.
Currently, pensions and other death benefits are passed on without IHT to the individual’s beneficiaries. The government is consulting on how it will go about implementing these changes, with the consultation closing today.
The letter reads: ‘We write to you as CEOs of AJ Bell, Hargreaves Lansdown, Interactive Investor, and Quilter to express our collective concern about the negative impact proposals to apply IHT to undrawn pensions will have on families and beneficiaries.’
Lobbying for a rethink, the letter accepts that tax-raising measures are for the government but that there are ‘better ways to achieve’ such.
‘The complexity of the proposed approach, namely bringing all pensions into estates for IHT, will lead to substantial delays paying money to beneficiaries on death and cause distress for bereaved families,’ it adds.
‘Ministry of Justice data shows the number of probate cases taking over a year to be granted has risen by 134% over the last three years. Under the current proposals, this will worsen significantly from April 2027,’ it reads.
‘Furthermore, all legal personal representatives, tasked with consolidating information across multiple pension schemes, will face an even greater burden. For grieving families, these delays and added responsibilities compound an already difficult situation, regardless of whether or not the estate pays IHT.’
Reporting issues have been identified by those close to the consultation, which is pointed out by the providers. ‘Pension schemes are often delayed in starting legal and tax processes due to unawareness of a member’s death,’ it says. ‘Most UK pension schemes operate a discretionary process, which can take time, and the IHT process has not been designed to reflect that pension funds are very different from other assets in the deceased’s estate.’
The letter claims that individuals who die after 75 face the ‘draconian’ scenario of double taxation via IHT and income tax, with higher rate taxpayers facing a levy of 64%, rising to 90% when the nil rate band is tapered away entirely.
‘Rather than pressing ahead with this flawed and potentially damaging approach, we urge the government to reconsider these proposals and work with the pensions industry to agree a simpler method of achieving the policy aim,’ it concludes.
‘To be clear, we are not arguing with the political decision to tax pensions on death. We are simply urging policymakers to consider pragmatic alternatives which would avoid needlessly delaying the payment of funds to beneficiaries and incurring additional unnecessary costs.’
Instead of applying normal IHT, one of the signatories, CEO of Quilter Steven Levin, called for the government to introduce a ‘flat-rate tax on unused pension funds that would apply after a pension nil rate band, set at an appropriate rate.
‘This would simplify the process, eliminate the risk of excessive double taxation, and speed up fund distribution. This approach balances the government’s revenue goals with the need to protect families during difficult times,’ Levin said.
The letter comes just months after AJ Bell’s CEO, Andy Bell, wrote to the chancellor urging her to rethink the policy. It is unclear whether that had any impact in terms of shifting the dial.
Julian Bovill (CityWire)