Two technical amendments to the inheritance tax (IHT) on pensions legislation, announced by the government in the Autumn Budget have been welcomed by STEP, the professional body of trust and estate practitioners.
Following chancellor John Healey’s budget this week, Emily Deane TEP, Technical Counsel and Head of Government Affairs at STEP said she welcomed the amends which “address some of the concerns and practical difficulties that STEP has raised about the forthcoming IHT changes that bring most unused pension funds and pension death benefits within the value of an individual’s estate for IHT purposes.”
‘We welcome the positive step in the right direction, and recognition by government that amendments were needed” she added. “STEP will continue to engage constructively with the government to support practical solutions so that practitioners and the public have the clarity they need to make the most informed estate planning decisions.’
Explaining the amendments announced in the Budget STEP provided a summary on both greater clarity for personal representatives, and greater flexibility for charitable giving.
Greater clarity for personal representatives
The first amendment will allow a prospective personal representative, where certain conditions are met, to direct pension scheme administrators to pay the IHT due directly to HMRC. This is intended to address a practical difficulty in which personal representatives may need to pay tax before obtaining probate, while being unable to access the relevant pension funds to meet that liability. The amendment should help alleviate this potential cash-flow issue for bereaved families by enabling IHT to be paid directly from pension funds in the circumstances specified by the legislation.
Greater flexibility for charitable giving
The second amendment will introduce a separate component for pension funds within the IHT charitable giving rules. This will give those administering estates greater flexibility when calculating eligibility for the reduced 36% rate of IHT, which may apply where the statutory charitable giving conditions are met, including the requirement to leave at least 10% of the relevant net estate to qualifying charities.
In particular, personal representatives will be able to decide whether notional pension property is included within the estate’s ‘general’ component or treated as a separate component when assessing whether the charitable giving conditions have been satisfied. This flexibility is intended to help ensure that the treatment of pension funds does not unnecessarily affect an estate’s eligibility for the reduced rate of IHT. It will give personal representatives greater scope to determine how notional pension property is treated when calculating whether the relevant charitable giving threshold has been met. This supersedes the position on charitable giving that was set out in HMRC’s Technical Note 1, which will be updated in due course.
In a recent survey of its members, STEP found that the vast majority of practitioners surveyed (93%) say clients are concerned about the forthcoming inheritance tax changes affecting pensions. Overall, 97% of practitioners surveyed say the changes will make estate planning more complex for clients, of which, 83% believe the new rules will make it significantly more complex.
Further details about IHT on pensions are expected in the next Technical Note, which STEP understands the government intends to publish later this year.
