HMRC has been urged to improve the draft legislation relating to inheritance tax (IHT) on pensions, with the Society of Pension Professionals (SPP) warning that changes are needed to ensure it better delivers the original policy intent and avoids unintended consequences.

The pensions industry previously welcomed the news that the government had made a number of amendments to its plans to bring pensions into the scope of IHT, particularly confirmation that lump sum death in service benefits are not to be brought into scope of the new IHT regime after all, and that personal representatives (PRs) will be liable for reporting and paying IHT, not pension administrators.

However, the SPP said that, despite these improvements, there are "still some issues to iron out".

In particular, the SPP said that the requirement for members to be in “employment” should be replaced with a requirement to be in “employment or other service” to avoid inadvertently excluding certain categories of member benefiting from the IHT exemption that applies to death in service benefits.
 
In addition to this, it recommended explicit exclusion from IHT for trivial commutation lump sum benefits.
 
This was not the only change, as the SPP suggested that the requirement that the scheme administrator should pay any tax within 3 weeks from the day on which it receives the beneficiary’s notice, is too short and should be extended to 30 business days.

The SPP's response also called for greater clarity on various issues, including estate components, the omission to act, income tax reclaim and transfers of value.

SPP chair of the SPP legislation committee, Shayala McRae, said: “Earlier this year the government accepted SPP’s key recommendation that administrators should not be liable for the reporting and payment of inheritance tax on pensions and that this responsibility should lie with personal representatives. 

"However, publication of this draft legislation shows there are still some issues to iron out to ensure it better delivers the original policy intent and avoids unintended consequences – and the recommendations in our response will help achieve that.”

This was echoed by Sackers partner, Claire van Rees, who said: “The draft legislation addresses many practical concerns raised by the pensions industry around workability of the initial proposals, albeit by pushing much of the burden on to personal representatives.

"However, some issues remain, particularly around clarifying exactly when death in service lump sums will be excluded from scope of IHT, and on some practical implementation areas.

"The overall policy also extends differences in treatment between unmarried couples and those married or in a civil partnership, particularly as DC pensions grow in importance.

"Once the legislation is finalised, trustees and pension scheme administrators will need to take stock on how to implement new processes, and what they should be communicating to members.”

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