Consultation response

Inheritance tax on pensions and death benefits

Challenges for personal representatives

PRs will face substantial challenges in identifying and reporting IHT due on unused pension funds and death benefits. They often do not have full visibility of the deceased’s pension arrangements, particularly where pensions are not in drawdown or are held overseas. While there are moves toward a digital reporting system, it is not yet operational, and PRs currently lack instant access to the necessary information. The emotional toll on PRs, who are frequently grieving family members or friends, compounds the difficulty of gathering extensive financial data within the statutory six-month timeframe.

Information sharing and practicality

The Government’s proposals to facilitate information sharing between PRs and pension providers are helpful in principle, especially where pension details are known and in drawdown. However, difficulties arise when PRs are unaware of existing funds, when funds are held outside the UK, or when pension schemes are discretionary and beneficiaries have not been nominated. The proposed four-week response time for pension valuations is generally achievable, but discretionary schemes may take months to determine whether a pension is taxable, particularly when there is a mix of exempt and non-exempt beneficiaries. Extending the tax payment deadline to nine months would provide PRs with a more realistic window to gather information and make arrangements.

Liquidity and recovery issues

Liquidity challenges are a recurring issue in estates, particularly where the deceased had limited cash and the primary asset is a residence. In such cases, PRs may struggle to pay IHT on the free estate to obtain probate. While some estates with land can make the first instalment of tax using available cash, the inclusion of pension values, especially if illiquid, complicates matters. It remains unclear whether IHT on pensions can be paid in instalments until beneficiaries receive funds. Although grants on credit are possible, they incur interest and reduce the inheritance available to families. Recovering tax from pension beneficiaries is also problematic, especially when assets bypass the estate or when beneficiaries are overseas or unresponsive. PRs may be reluctant to pay tax from the free estate if beneficiaries differ, fearing they cannot recover the amounts. A more equitable approach would be to make pension beneficiaries ultimately liable for the IHT due on pension components, with PSAs acting as safeguards to ensure tax is paid.

Awareness and implementation

Public awareness

Awareness of these proposals among those affected is extremely low. Most clients are unaware of the changes, and even those who are informed do not understand how they will work in practice or the burden they may place on PRs. PSAs should take responsibility for informing individuals and ensuring beneficiary details are up to date. The Government must also ensure that information reaches those without internet access through alternative media channels.

Timetable and transition

The proposed implementation date of April 2027 is ambitious, given that HMRC’s current IHT processes are not working as best as they can. While digital reporting is expected by 2027, significant work is required to make the system functional and supportive of PRs and pension beneficiaries. There are few planning options available to individuals with pensions, and even with a transition period, the long-term impact may be unavoidable. Introducing a lower initial IHT rate of 20% could mitigate panic withdrawals and preserve pension funds for future needs. We are already hearing of individuals considering leaving the UK to benefit from more favourable tax regimes abroad.

Business and agricultural property reliefs

Valuation challenges

The proposed changes will make it extremely difficult for PRs to report and fund IHT within six months. Valuing trading businesses requires not only a business valuation but also valuations of individual assets, which must be conducted by professionals at additional cost. In cases involving private company shares, obtaining necessary information can be challenging, especially if directors are uncooperative. These complexities will likely keep estates open longer and create uncertainty for businesses and beneficiaries.

Valuation disputes are also likely to increase. Different methodologies and assumptions can produce widely varying results, and valuations depend heavily on sector, future prospects, shareholding size, and market interest. Illiquid businesses are particularly difficult to value, and HMRC’s share valuation team is not currently equipped to handle the anticipated volume of non-trading share valuations. The administrative burden on HMRC has not been adequately considered, and the resulting delays will prolong estate administration and create uncertainty.

Impact on family businesses and farms

The Government’s impact assessment appears to underestimate the number and type of estates affected. Historically, BPR claims did not require formal valuations, especially where assets passed to a spouse. As a result, many estates were not captured in previous assessments. Smaller farms and modest businesses, which were previously unchallenged, may now face scrutiny. With 93% of UK businesses being family-owned and employing over one million people, the broader economic impact has not been sufficiently considered. The reforms could deter foreign investment and affect the establishment of UK subsidiaries by non-UK companies.

Preparedness and support needs

Business owners and farmers are largely unprepared for these changes. Based on our conversations, around 90% are unaware, 8% hope to outlive the changes, and only 2% are actively planning. Support is most urgently needed for older clients aged 75 and above, who have limited time and options to restructure their affairs. Many will not survive the seven-year period required for gifts to be effective, and some lack the physical or mental capacity to act. A compassionate, age-related transitional arrangement should be introduced to protect those who have planned in good faith under the current rules. Younger business owners will have more opportunities to plan, but the short timeframe still presents challenges. The non-transferability of the inter-spouse allowance is widely misunderstood and conflicts with the long-established concept of transferable Nil Rate Bands. Most wills are based on current rules and will need to be updated or varied, adding further cost and complexity. At a minimum, allowing the £1 million BPR relief to be transferable would support families unable to restructure in time.

Planning complexity

Although the concept of the reforms may seem straightforward, it is extremely difficult for those eligible for reliefs to assess their IHT liability. Accurate planning requires two valuations, one for the business and one for its component assets, which are costly and time-consuming. Depreciated values in accounts are not reliable, and farming assets such as land and machinery require professional surveys. Given the low-income yield of farming, the cost of valuations is disproportionate and burdensome.

Timetable and transition

Introducing these measures in such a short timeframe risks significant harm to the mental and physical health of those affected. Elderly shareholders and business owners will not have time to prepare. We recommend a five-year tapering approach to BPR reduction, starting at 100% in 2025/26 and decreasing by 10% annually until reaching 50% in 2030/31.

Consultation process and broader concerns

The consultation process itself has been inadequate. These changes are substantial and warranted a more thorough and inclusive consultation before the October 2024 Budget. The reforms will affect a wide range of individuals, families, PRs, businesses, and employees. They do not adequately protect vulnerable individuals, including the elderly and those with limited capacity. Moreover, the increased complexity of the IHT system risks making probate inaccessible to unadvised taxpayers, undermining access to justice.

It is clear that the proposed changes will have far-reaching consequences, not only for those directly affected but also for the wider economy. The Government must take a more considered and phased approach to implementation, ensuring that support systems, awareness campaigns, and transitional reliefs are in place to mitigate the impact.

For more information, get in touch with your usual Crowe contact.