Further clarifications and streamlining are needed around the government's plans to bring pensions into the scope of inheritance tax, industry experts have said, amid concerns that the changes could cause a "bureaucratic nightmare for grieving families".

Chancellor, Rachel Reeves, announced plans to remove the concession for pension pots to be passed on to anyone free of inheritance tax (IHT) as part of her Autumn Budget last week, alongside plans to hike employer's National Insurance contributions.

However, Squire Patton Boggs said that it is "clear" from the consultation document that the proposals are wider reaching than simply reverting to the pre-2015 position for defined contribution (DC) pensions.

Indeed, the government's estimates suggested that around 49,000 estates per year that include pensions will face an inheritance tax bill, including 10,500 who would not have faced IHT at all if pensions were not included, and 38,500 who were already in the IHT net but will now face an additional bill.

Under the proposals, all death benefits from both DC and defined benefit (DB) registered pension schemes (whether discretionary or non-discretionary) will be included within the value of a person’s estate for IHT purposes, save in relation to funds that can only be used to provide a dependant’s scheme pension and lump sums paid to a qualifying charity.

As part of the new process, pension scheme administrators will become liable for reporting and paying any IHT due, with Squire Patton Boggs warning that adminsitrators will have a "relatively short and challenging timescale" before penalties would be levied.

Confirmation of the recipient of the death benefits would also need to be provided within two months of death, before the member’s personal representatives can submit information to an online calculator to identify the proportion of IHT attributable to the pension fund, to enable the administrator to calculate the IHT payable.

The logic behind this, according to Squire Patton Boggs, is that the alternative would be to require the member's personal representatives to pay the IHT attributable to the pension benefit – in circumstances where they would not have access to the pension funds.

However, there are some areas that still need further clarification, as Squire Patton Boggs noted that the consultation document includes a statement that “life policy products purchased with pension funds, or alongside them as part of a pension package offered by an employer are not in scope of the changes in this consultation document.

"On the face of it, this suggests that any lump sum death benefits from registered pension schemes that are insured, rather than payable out of scheme funds, would be exempt from the IHT calculation," it explained.

"Also, on the face of it, excepted group life assurance schemes (EGLAS), which are unregistered pension schemes, would not be caught by these proposals (although note that in some circumstances IHT is already payable on death benefits paid out by an EGLAS under existing laws because of their classification as relevant property trusts for tax purposes)."

The new process outlined by the government has also sparked broader concerns, with LCP partner, Steve Webb, warning that new rules on pensions and IHT could prompt a "bureaucratic nightmare for grieving families", making the whole process "much more convoluted".

In particular, Webb raised concerns over the fact that bereaved people would be required to identify all of the relevant pensions of the deceased, to contact and obtain information from them, to use that information to get IHT information using an HMRC tool, to go back to the schemes and then wait up to six months for payment.

In addition to this, he pointed out that other bereaved families who may not know the current value of the deceased person’s pensions or death benefits will have to obtain this information simply to check if IHT is due or not.

Webb warned that this could lead to delays, including delays in releasing death-in-service lump sums, which could themselves could be much reduced if subject to tax of up to 40 per cent.

He stated: "Including pensions within the scope of IHT will add greatly to the burden which families face.

"People will need to know which pension schemes to contact, will have to rely on the efficient administration of pensions – with the whole process on hold until the slowest scheme has replied – and then potentially wait months more before death benefits and pension balances can be released by the scheme.

"The whole thing could turn into a bureaucratic nightmare for grieving families. If this proposal is to go ahead, the government will need to come up with a much more streamlined process than is currently proposed’.

---