The government’s proposals 

At the Autumn Budget 2024, the government announced the following measures to take effect from 6 April 2027: 

• most unused pension funds and death benefits will be included within the value of a person’s estate for IHT purposes; and 
• PSAs will become liable for reporting and paying any IHT due on pensions to HMRC.  

After 12 months, the beneficiaries of the pension pot become jointly and severally liable with the PSA’s for the IHT. 

At the same time, HMRC published a consultation seeking views on the processes required to implement the changes.   

Issues with the proposed process 

ICAEW has responded to the consultation, expressing its support for the measure to tax all pensions fairly. However, ICAEW is extremely concerned that the protracted level of communications that will be needed between personal representatives (PRs) and PSAs will be unworkable to establish the PSA’s share of the nil rate band amount . 

ICAEW believes that the proposed process, along with the need for PSAs to comply with data protection laws and to verify the identity of the PRs, will cause delays to the payouts to beneficiaries and to the payment and reporting of IHT to HMRC. The process will be even more complicated where there are multiple pension pots and/or non-UK PSAs are involved.  

Suggestions for improvements 

ICAEW has proposed the following alternatives for consideration:  

• introducing a de minimis value of the death benefits, similar to a nil rate band, under which pension funds are not required to account for IHT;
• requiring PSAs to make a flat deduction of IHT of somewhere up to 40% so that PSAs can pay out to beneficiaries as soon as possible. The PRs would then consider the overall value of the estate and claim refunds from HMRC if the IHT had been overpaid, as well as deal with any amendments;
• the reintroduction of the 55% charge on death on unused defined contribution schemes, that was abolished in 2015; and
• having a cut-off date, of say four years, after which HMRC would not seek to collect any additional IHT due on pension funds that were not previously known about.  

Other concerns 

ICAEW considers that there will be a risk of non-compliance from overseas pensions schemes, such as qualifying non-UK pensions schemes that are not currently required to be registered with HMRC.