The Society of Trust and Estate Practitioners (STEP) has called on the government to simplify planned inheritance tax (IHT) changes for pensions, warning that the proposed framework could create delays, increase costs, and place significant burden on bereaved families and executors.

Under measures announced in the Autumn Budget 2024, most unused pension funds and death benefits will be brought within the scope of IHT from April 2027.

Following the publication of HMRC's technical note on the reforms and a related consultation on information-sharing regulations, STEP welcomed some improvements to the proposals but argued that the overall framework remains "fundamentally flawed" and overly complex.

The professional body said the proposals are heavily focused on the needs of pension scheme administrators (PSA) and risk creating practical difficulties for personal representatives (PR) responsible for administering estates.

STEP warned that the reforms could lead to significant probate delays, increase administration costs and expose executors to legal and tax risks, potentially resulting in beneficiaries receiving less than the deceased intended.

Commenting on the proposals, STEP technical counsel and head of government affairs, Emily Deane, said: "The government has made genuine progress in addressing some of the industry's initial concerns, and the additional detail provided in its recent technical note is helpful.

"However, these changes significantly increase the burden on executors who are navigating the loss of a loved one. At what is already a difficult time, individuals may be expected to track down multiple pension arrangements, engage with providers before probate, and deal with complex and evolving tax requirements.

"What is needed is a fair system that works for all parties involved, and without simplifications, there is a real risk of delays, higher costs and growing reluctance to take on the executor role."

Among the concerns highlighted by STEP was the proposed treatment of interest charges.

The organisation argued that, because IHT payment notices cannot be submitted until probate or letters of administration have been granted, interest would automatically accrue on unpaid tax during the normal estate administration process.

The body also highlighted a mismatch between the timescales available to PSAs and executors, warning that pension benefits could be distributed before PRs have the opportunity to issue payment notices, potentially leaving executors exposed to tax liabilities on assets they do not control.

STEP further argued that the framework assumes PSAs can easily determine whether beneficiaries qualify for IHT exemptions, despite often lacking access to the relevant personal or legal information.

The organisation stressed that recovering IHT from pension beneficiaries could prove difficult where beneficiaries are unknown, overseas or unwilling to cooperate.

STEP UK Technical Committee member and Dignity Legal Services head of legal, Ian Bond, said: "The government must simplify the IHT on pensions framework so tax can be paid fairly and practically from pension funds themselves, rather than leaving executors and bereaved families to manage complex liabilities on assets they may not control.

"What is needed is a process that ordinary executors can actually use in real life, not just one that works on paper."

Meanwhile, the organisation also raised concerns that executors will need to identify and engage with all of a deceased person's pension arrangements, potentially across multiple providers, with limited clarity around what constitutes "reasonable steps" to locate all pension assets.

According to STEP, the changes could deter some individuals from acting as executors and increase the likelihood of disputes during estate administration.

STEP member and Jurit partner, Jo Summers, added: "In practice, we expect this to slow estate administration down. Pensions are not always easy to identify, and getting consistent, timely information from different providers can be challenging.

"Even with the new mechanisms, there is a risk that executors are left managing multiple moving parts, with tax deadlines running ahead of the information they need."

Summers also suggested that the reforms could affect retirement saving behaviour.

"The new rules may also deter people from investing in pensions given that, from April 2027, the changes introduce a huge amount of complexity with no IHT advantage," she suggested.

To address its concerns, STEP has proposed a number of changes, including calculating and paying IHT directly from pension funds rather than through estates, extending the existing direct payment scheme to cover pension-related IHT liabilities, and introducing an automatic grant-on-credit mechanism to prevent beneficiaries from being penalised by administrative delays.

"These reforms are going ahead, but there is still time to make them work better in practice and without overwhelming people with unnecessary complexity," continued Summers.

"STEP is actively engaging with HMRC and will continue to push for simplification and improvements that bring clarity, workability and fairness."

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