I appreciate that the full operation of this has yet to be published. It will be interesting however to see what will be put in place to deal with increases in the value of an estate which only come to light perhaps some years later and which need to be reported and tax and interest paid. Where will the pension fund administrators get the funds to pay their share if they have already paid out what remains of the DC or DB scheme after paying its share of the tax? For example, I am currently dealing with a case where the death occurred in 2017 but in 2023, compensation funds authorised by the Australian court, which were hitherto unknown, became payable, and it was necessary for me to reopen the IHT position and pay tax and interest. Indeed, having done this, a further asset in Australia has recently come to light, namely, and uncashed cheque for A$ 21,000 (approx.ÂŁ10700) which the New South Wales government, which was holding the money, have now paid it to the estate. This has resulted in further tax and interest being payable and of course, the rate of exchange in 2017 was much more favourable to the pound A greater part of the funds received has had to be paid In tax and interest. Administratively therefore, unless there is a cut-off point for the pension scheme administrators, after which they can be no longer liable, the operation of this could become rather difficult from April 2027!
12 months after the death of a member, their beneficiaries will become jointly liable with PSAs for the Inheritance Tax due on unused pension funds or death benefits.
The consultation doesn’t appear to address the position if the beneficiaries have spent it, or live abroad, or just generally refuse to pay up. Unless their liability is limited, the administrators may find themselves with a personal liability. I’d hope this will be resolved otherwise administrators will want to retain reserves or even security on larger sums.
But it’s okay though, because HMRC will be helpful:
“as PSAs are liable for the Inheritance Tax, if they are able to make the further Inheritance Tax payments or pass repayments onto the beneficiaries, HMRC will work with them to resolve the Inheritance Tax position”
My fear/suspicion is that HMRC will adopt the same mechanism as for family trusts, where the trustees do remain liable and so do maintain reserves until the position is clear and/or they have clearance (I applied for a clearance cert. 8 months ago and still waiting).
That system isn’t quite so bad when the trustees are also the execs, beneficiaries, or are closely related, or friends, or professionals involved with the family. They can take a view on the risks. Pension fund administrators will not know the deceased or deceased’s family and so may (quite fairly) want to hang onto funds as long as possible where there is any doubt over the value of the estate.
A similar problem will arise if there is a subsequent agreed alteration to probate values which changes the proportion of total inheritance tax attributable to the pension fund(s).
Has there been further clarification? I noticed in the House of Lords that the “dashboard” may be available to the PSA to trace pensions and legislation whould then follow. This “Dash” Board must be the slowest dash ever I seem to recalll discussion of this in the 1980’s
pension beneficiaries will be jointly liable for any Inheritance Tax due on the pension and solely liable for Inheritance Tax due on any future pensions that are discovered after a clearance certificate has been granted to the personal representatives
If I remember correctly, we started with the pension administrators being primarily liable/responsible for the tax, then it was the beneficiaries, and now it is the PRs (with assorted add-ons to direct the administrators to pay etc) .
No, that’s not quite right. Imagine a marginal £100 in the pension and a marginal £40 IHT due on it (e.g. because the NRB has already been used by failed PETs). The normal position will be that the PSA pays the £40 of IHT leaving £60 in the pension. The poor guy who died was over age 75 and so income tax is due, for an additional rate taxpayer, at 45% on the £60 left. So the £100 in the pot means £33 in the pocket. A 67% marginal tax rate.
Worse case? An almost worse case scenario is that the estate could be valued such that the RNRB taper is relevant. So that ÂŁ100 in the pension means ÂŁ60 of IHT paid by the PSA, with ÂŁ40 left for the less-lucky recipient. That person happens to have a marginal income tax rate of 60% because of the unique way out tax system works (taper of personal allowance). So after tax, they are left with ÂŁ16 - an 84% marginal tax rate. Obviously, these are specially contrived circumstances but the taper of the RNRB is likely to be relevant for some with chunky pensions.
The purposes of the new s596B ITEPA 2003 (clause 67(3) of the latest version of Finance (No 2) Bill for those playing along at home) is to deal with a situation where, for example, the PSA did not pay the IHT but the PRs did and got reimbursed by the beneficiary. In that case, the IHT is paid by the PR and so the beneficiary draws ÂŁ100 but only ÂŁ60 is taxable because of s596B (because she uses ÂŁ40 of the ÂŁ100 to reimburse the PR). This brings the beneficiary back to the same net of tax position of the PSA paying the IHT.
I could make a worse case than that by assuming that someone has lots of young kids and is particularly unfortunate with the high income excess relief charge. But I’ll leave that to someone else.
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