I drafted Wills for clients some years ago that include the 10% legacy clause to charities to benefit from the reduced rate of IHT.
Understandably my clients are concerned that they are now going to have to give a 10% value of their pensions to charity also in order to benefit from the 36% rate.
Do we know whether this will be the case yet? If still up in the air, what should we be advising clients?
Summer-Autumn 2025: publish a response to the consultation
Summer-Autumn 2025: include clauses in a draft Finance Bill to change the IHTA
Autumn 2025: consider comments on the draft Finance Bill
Autumn Budget 2025: provide confirmation of what is intended in the Budget
Week or so after Budget 2025: Publish the Finance Bill,
Spring 2026: Royal Assent
6 April 2027: new rules apply
Now I might be wrong on the above. I have a year gap between the legislation being finalised and the rules applying because I suspect that there will need to be a huge amount of guidance and training for pension scheme administrators unless the government radically simplify the current proposals. And I really hope that they do!
From a techy perspective, you would be looking out for changes to Schedule 1A IHTA 1984.
So what would I say to a client
It’s still up in the air.
I’d expect we’d get 12 to 18 months of time before the new rules change to understand what the government plans
So that gives time to decide what you want to do and update your will
Let’s put a time in the diary for, say, December 2025 to have a chat about it.
In the meantime, you might want to think about the other IHT impacts that this will have for you (e.g. worth taking the PCLS sooner rather than later, take more out now and pay income tax on it at 40% and spend/give to family or charity now (gifting now gets income tax relief whereas it won’t in your will), working out if the RNRB will be tapered and dealing with that, etc).
I don’t think Sch 1A is the likely place. New ss151-3 seem more likely and at least these will have to be amended/repealed in whole or part. The precise methodology will be interesting. As will the relationship with the current income tax regime.
How will they deem funds technically held on DT to be taxed as part of the death estate, especially if “nominated” away from the deceased. Will the nominees be taxed on such funds when they die? Treble taxation all round!
We all know the mayhem that is caused when tax legislation deems a fictional state of affairs to exist which is contrary to reality in fact or other relevant law or both. You get what that sage Mr Roy Keane calls “Nunsints” and what when we see the new law we might say to HMG/HMRC, echoing him, “Do yer jarb!” as invariably they don’t do it properly or at all. But such is the self-awarded prerogative of the omnipotent arrogant deaf.
They will have to make lots of changes to the legislation. For example:
To create the link between the deceased and the member of the pension scheme (or the person who received the pot following death).
That an amount is included in the deceased’s estate (and not any one else’s).
How that amount is determined (not all payments by the pension scheme will necessarily be in scope, some valuations can be complicated - e.g. a contingent annuity).
How the nil rate band is apportioned.
Who is liable for the tax (PSA, PRs, beneficiaries and in what circumstances).
What assumptions should the pension scheme administrator make (e.g. rely on representations from the PR).
How and when the tax is paid (e.g by six months, when a distribution is made to a beneficiary, existing AFT).
What happens if something occurs after the tax is paid - for example, a further pension scheme is discovered, a house is valued higher after an enquiry, a failed PET is discovered, a DoV is made by a spouse, the value of the pension scheme’s assets collapses? If the PSA might have to pay more after a distribution, why would it make full distributions?
Who bears the economic interest on late paid tax / penalties and what happens if the PSA does not find out that someone has died for a long time.
What reporting obligations does the PSA have (e.g. to HMRC via the quarterly AFT return or something else, to the PRs, to people who may become PRs, to other PSAs, to the beneficiaries).
What is the timetable for reporting (e.g. it has to be quick to tell PRs)
What happens with the 36% rate.
What happens if there are no PRs, or a dispute between them.
Is there a de minimis.
How the spouse exemption will work (s18 doesn’t apply as written).
Do other reliefs apply (e.g. BPR, APR)
What happens if PRs have insufficient funds to pay the IHT related to the pension (e.g. IHT paid, funds distributed, and then a long-lost pension is discovered).
What assumptions can the PRs make in relation to the pension expected to be paid to a spouse, when the PSA might decide to do something different or the spouse may die before the PSA exercises its discretion to do this.
Make clear that a beneficiary cannot have a tax bill for more than they receive (government’s consultations wants the PSA and beneficiaries to be jointly and severally liable) and beneficiaries of the estate and pension scheme may well be different people.
What happens if some time down the road a small pension is commuted?
Does quick succession relief apply?
All this says, to me, that it would be much more sensible for there to be a standalone tax charge on the PSA. But I don’t understand the politics of this to understand how likely it will be.
What I do know is that the quality of the administration of some household name pension providers is appalling. And I say that as someone who has received compensation from a household name SIP provider for poor pension scheme administration. So I hope the government really does simplify its approach.
I’ve not seen anything to suggest that the current income tax regime will change (so no income tax on drawdown by a beneficiary if the pension scheme member dies before age 75, income tax otherwise). If no change, there is the potentially for quite high marginal tax rates (e.g. 91.3% where RNRB is tapered, death age over 75 and the beneficiary is an additional rate taxpayer).
They will have to make lots of changes to the legislation. For example:
To create the link between the deceased and the member of the pension scheme (or the person who received the pot following death).
That an amount is included in the deceased’s estate (and not any one else’s).
How that amount is determined (not all payments by the pension scheme will necessarily be in scope, some valuations can be complicated - e.g. a contingent annuity).
How the nil rate band is apportioned.
Who is liable for the tax (PSA, PRs, beneficiaries and in what circumstances).
What assumptions should the pension scheme administrator make (e.g. rely on representations from the PR).
How and when the tax is paid (e.g by six months, when a distribution is made to a beneficiary, existing AFT).
What happens if something occurs after the tax is paid - for example, a further pension scheme is discovered, a house is valued higher after an enquiry, a failed PET is discovered, a DoV is made by a spouse, the value of the pension scheme’s assets collapses? If the PSA might have to pay more after a distribution, why would it make full distributions?
Who bears the economic interest on late paid tax / penalties and what happens if the PSA does not find out that someone has died for a long time.
What reporting obligations does the PSA have (e.g. to HMRC via the quarterly AFT return or something else, to the PRs, to people who may become PRs, to other PSAs, to the beneficiaries).
What is the timetable for reporting (e.g. it has to be quick to tell PRs)
What happens with the 36% rate.
What happens if there are no PRs, or a dispute between them.
Is there a de minimis.
How the spouse exemption will work (s18 doesn’t apply as written).
Do other reliefs apply (e.g. BPR, APR)
What happens if PRs have insufficient funds to pay the IHT related to the pension (e.g. IHT paid, funds distributed, and then a long-lost pension is discovered).
What assumptions can the PRs make in relation to the pension expected to be paid to a spouse, when the PSA might decide to do something different or the spouse may die before the PSA exercises its discretion to do this.
Make clear that a beneficiary cannot have a tax bill for more than they receive (government’s consultations wants the PSA and beneficiaries to be jointly and severally liable) and beneficiaries of the estate and pension scheme may well be different people.
What happens if some time down the road a small pension is commuted?
Does quick succession relief apply?
All this says, to me, that it would be much more sensible for there to be a standalone tax charge on the PSA. But I don’t understand the politics of this to understand how likely it will be.
What I do know is that the quality of the administration of some household name pension providers is appalling. And I say that as someone who has received compensation from a household name SIP provider for poor pension scheme administration. So I hope the government really does simplify its approach.
I’ve not seen anything to suggest that the current income tax regime will change (so no income tax on drawdown by a beneficiary if the pension scheme member dies before age 75, income tax otherwise). If no change, there is the potentially for quite high marginal tax rates (e.g. 91.3% where RNRB is tapered, death age over 75 and the beneficiary is an additional rate taxpayer).
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