The government should make "major changes" to ensure that the new rules to bring unused pensions into the scope of inheritance tax (IHT) are implemented "fairly and effectively", LCP has said. 

In the firm's evidence to the House of Lords Economic Affairs Committee, LCP head of pensions and tax, Alasdair Mayes, and LCP partner, Steve Webb, argued that the April 2027 inclusion of pensions in the IHT net needs to be accompanied by a range of practical changes.  

In particular, the pair warned that whilst the justification for the policy is that defined contribution (DC) pensions were being used (by some) as a vehicle to avoid IHT, the scope of the policy goes far wider and includes ‘death in deferment’ lump sums from DB schemes and even small funeral grants from pension schemes.

Given that neither of these systems is being used to avoid IHT, LCP warned that it "seems unfair to catch them in the scope of the policy".

Mayes said: “The rationale for this policy was to stop DC pensions being used for avoiding Inheritance Tax. 

"But the new rules will capture other types of pension rights, including certain lump sum death benefits from DB pension schemes, where there could be no suggestion that they are being used to avoid tax. These types of benefits should be excluded from the changes. 

LCP's submission also warned that the new process could lead to a delay in money being released to those in need, including a widow or widower exempt from IHT. 

The firm pointed out that the new rules are not clear as to what assets can be paid until the whole process has been completed and the personal representative (PR) knows the value of all pension and non-pension assets and how these are to be split between exempt and non-exempt beneficiaries, meaning that even a payout where no IHT is due could be put on hold for months.

"We need to ensure that the new processes do not create delays in getting pension money to bereaved families" Mayes explained.

"If the policy has to go ahead, much more thought needs to be given to minimising the impact on both grieving families and on pension schemes.”

In addition to this, the pair pointed out that while the person dealing with the estate, the PR, will be liable for ensuring that IHT is paid, they may have no control over some of the funds.

The pair therefore suggested that the PR should be responsible only for IHT due on the rest of the estate, or for the PR to have the power to require the pension scheme or provider to deduct IHT before paying out. 

LCP said that a longer deadline for PRs to ensure IHT is paid should also be considered, or at least waiving any penalties and interest, warning that PRs may be penalised for matters beyond their control, such as delays in obtaining information about fund values and about other beneficiaries. 

Webb, who will also be appearing in front of the Economic Affairs Committee later today (3 November), added: "The new regime will create a lot more work both for PRs dealing with estates and for pension schemes and providers.  

"This is already a difficult time for families, and they will now face a ticking clock of six months before interest and penalties could apply if IHT is not sorted out.  

"This deadline needs to be extended, otherwise people will be punished for something which may well not be their fault.  PRs should also not be held accountable for the IHT on pensions paid out to another beneficiary, as this is money they have no access to.”

The pair also raised wider concerns around the proposed timelines, warning that, given the time pressure on the whole process, more needs to be done to ensure that pension schemes become aware of the death of a member as soon as possible. 

As part of this, it encouraged the government to consider letting its ‘Tell us Once’ service share information with pension schemes and providers, saving the bereaved family from having to do this, and requiring registrars to share data about deaths more quickly and frequently than the current monthly data feed. 

Looking even further ahead, the firm suggested that enhancements could also be made to pensions dashboards, to ensure that it is made available to bereaved families, and the data displayed expanded to include unspent pension balances, to help those trying to locate all of someone’s pensions following a death. 

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