Four key issues HMRC needs to fix in its Inheritance Tax on pension proposals

I believe there are four key issues that HMRC need to address in their proposals on how to apply inheritance tax (IHT) to pension benefits.

The changes required are so fundamental a further consultation will be needed on the updated proposals to ensure they are practical to implement.  

On 30 October 2024 the Chancellor announced that IHT would be applied to unused pension assets for deaths on or after 6 April 2027. HMRC have run a consultation on the detail and are working through extensive feedback from the industry. A response to the consultation and draft legislation are promised this year.

Our analysis suggests that the revenue the changes will generate is likely to be significant, perhaps £40bn over the next 20 years. If members respond to the changes by drawing down on their pension assets earlier than they otherwise would, this revenue could come through to the Exchequer relatively quickly. Therefore, I don’t think the policy will be changed materially, but there are key issues that need to be addressed.  

1. Delays in payment of benefits  

It’s vital that dependants receive benefits promptly following death. The initial proposals would cause delay for everyone even though only a small proportion of deaths will result in an IHT bill. The measures need to be targeted at those where tax is due.  

2. Unrealistic deadlines  

The proposed process is too complex and interdependent on too many parties. This will result in lots of amendments, wasting time for HMRC and everyone else. Interest and penalties may be triggered through no fault of the beneficiaries. In other cases tax will be paid where none is due and refunds required.  An efficient on-line portal is required to process payments and refunds in “real-time”.  

3. Data protection  

A basic principle of GDPR is that personal data should not be shared more widely than necessary. The proposed process involves sharing lots of personal data even where no tax is due. Data sharing needs to be minimised.  

4. Scope creep  

The Chancellor’s statement referred to unused pension assets, but HMRC’s consultation included death benefits and potentially many employer-provided multiple of salary life assurance schemes too. The stated aim is to “align” the tax treatment, but in my view it creates new anomalies (a lump sum multiple of salary death benefit paid from a pension scheme funded on an uninsured basis will be in scope of IHT but if provided outside a pension scheme will not be in scope), and the scope of the proposed measures was unclear (will insured death benefit paid from a pension scheme be in scope), limiting the effectiveness of the consultation.  

Solving the problem  

These problems can be solved by:  

• Providing a clear exemption from the new reporting requirements for payments that will still be exempt from IHT, such as those to a spouse or civil partner. 
• Enabling pension schemes to pay small sums (if not all sums) without needing to deduct tax at source. Tax can be collected from the beneficiaries direct in the few cases where it will be due. 
• Setting deadlines based around when pension schemes pay benefits.  
• Sending personal data only where tax might be due and then only to HMRC direct. 
• Not extending the measures to life assurance benefits without a full and transparent consultation. 

With such significant changes needed to the proposals a key further step is that there needs to be a technical consultation on whatever new measures are brought forward. We need a regime that will work. Making sure that is the case before moving to draft legislation will save time for everyone in the long term. 

More details on how the new regime can be made to work are provided in our consultation response.