Finance Bill containing IHT changes published

In our previous Update we reported on the draft legislation which had been published in relation to the Government’s plan to bring unused pension funds and pension scheme death benefits within scope of IHT from 6 April 2027.  The Finance Bill containing the relevant provisions has now been introduced into Parliament.

The Bill provides that a member’s pension pot (plus any other funds that may or must be used to provide benefits on the member’s death) will in principle be treated as forming part of the member’s estate unless the property may only be used to provide an “excluded benefit”.  If a benefit may only be paid as one of the following, it will be an excluded benefit:

• a dependants’ annuity or nominees’ annuity that was purchased together with a lifetime annuity payable to the member;
• a “dependants’ scheme pension” as defined in the Finance Act 2004 (not relevant to most SSASs and SIPPs);
• a trivial commutation lump sum death benefit that extinguishes the person’s entitlement to a dependants’ scheme pension (not relevant to most SSASs and SIPPs); and
• a benefit that is only payable on the death of an active member who is in “employment or other work of a particular description” immediately before death and is not payable in respect of a member who does not meet those conditions.

The effect of the provisions is that a pension pot that remains on the death of the member (which could be because the member had not yet started to draw benefits or because the member leaves unused drawdown funds) will in principle form part of the member’s estate.  This is the case even if the deceased member was an active member on death, as a benefit is only an “excluded benefit” if it is only payable in respect of active members.  A death benefit comprising funds in the deceased member’s pot will be payable whether the member is active or not.  The IHT exemption for spouses and civil partners will still apply so that a benefit paid to the deceased member’s spouse or civil partner will normally not be subject to IHT regardless of what type of benefit it is.

In a change from the draft legislation, the Finance Bill contains new powers for the deceased’s personal representatives (PRs) to give a “withholding notice” requiring the scheme administrator to withhold 50% of benefits for up to 15 months. (This does not apply to benefits paid to the deceased’s spouse or civil partner.)  There is also a power for the PRs or beneficiary to require the scheme administrator to pay the IHT directly where the amount due is at least £1000 (a change from the figure of £4000 contained in the draft legislation).  Scheme administrators who fail to pay IHT when legally required to do so by a notice can themselves become liable for the IHT.

Action required

With just over a year to go until the changes take effect, SIPP and SSAS providers need to be preparing now.  Issues to consider are:

• whether changes are required to scheme trust deeds and rules;
• changes to processes to ensure that withholding notices and requests for direct tax payments are dealt with appropriately;
• changes to customer literature; 
• changes to T&Cs;
• where administration is outsourced to a third party, review of administration agreement processes, service level agreements and protections.