- Bereaved relatives will have six months to deal with their loved ones’ pensions
Grieving families will only have six months to pay death duties on pensions after the Treasury rejected official calls for an extension.
The Labour Government has rejected recommendations from the House of Lords to extend the deadline for families to cough up inheritance tax due on pension assets.
It’s a brutal blow for bereaved families who must now deal with an administrative nightmare during a time of grief – or face punishing late fees.
Unused pension pots will be brought into an estate for inheritance tax purposes from April 2027, which will drag thousands more families into the 40 per cent death duty net.
The change has upended retirees’ financial plans. But pension gurus have also warned the tax grab will trigger administrative jams that will be a nightmare for families to navigate.
Death duty trap: Insiders have warned families may miss IHT deadline from next April
How does inheritance tax work?
Everyone has a £325,000 allowance – called the nil-rate band – that can be passed on free of inheritance tax (IHT).
There is an additional tax-free allowance of £175,000 specifically for when the family home is left to ‘direct descendants’ such as children or grandchildren. Any wealth above this is subject to a 40 per cent rate.
Administrators get six months – starting on the last day of the month when the person died – to add up their assets, calculate what is owed and pay any money due to the taxman.
It means that from April a deceased’s loved ones who are administering the estate will have just six months to find lost pensions, calculate the total amount of death tax due and pay it before the six month deadline – an ‘impossible’ feat, the Lords says.
After this deadline, interest is added to the tax bill at a rate of 4 percentage points above the base rate.
The concern that families would be unable to make the payments in time – and fall victim to the high interest rates – caused the House of Lords in January to officially recommend that this six-month period be increased to one year for pension assets.
The Lords report warned: ‘In many cases, the inheritance tax deadline to which personal representatives will be subject will be incompatible with the timescales on which existing pensions processes operate,’ read the report.
‘It cannot be right to impose on taxpayers a timescale for payment of tax if that timescale is for many likely impossible to meet.’
An extension would allow executors of an estate more time to sort out tax affairs during a time of grief, it said.
But the exchequer isn’t budging – and has ruled out extending the deadline in a major blow for families with modest incomes who have been dragged into the tax net.
The Treasury on Monday revealed that it would not increase the ‘existing, longstanding deadlines which ensure tax is collected quickly and efficiently’.
Labour’s refusal to budge means executors grappling complicated estates could be forced to fork out late fees as high as 7.75 per cent.
Rachel Vahey, of stockbroker AJ Bell, says: ‘It’s disappointing that the government has dug its heels in and isn’t even willing to consider a change to the six-month deadline to pay IHT.
‘Adding pensions to the IHT calculation is going to prove to be an administrative nightmare for personal representatives – who are often family members appointed to work out what happens to someone’s estate when they die – at a time when they are at their most vulnerable.
‘The six-month deadline was set in past centuries at a time when settling financial matters was generally a more straightforward process. As the number of people paying IHT continues to soar, the longer HMRC is taking to deal with the paperwork and issue IHT bills.’
The Lords feared that personal representatives could be liable for tax on pensions they do not control and cannot access. This could create cash-flow pressures, deterring relatives and friends as well as paid professionals from taking on the role.
The exchequer has also ignored warnings from experts about the ‘double taxation’ of these pension pots.
Families could be taxed twice under the new death tax rules set to come into force next April. Retirement pots can only be passed on free of income tax when someone dies before age 75.
If a saver is aged over 75 when they die, their beneficiaries are still going to have to pay their normal income tax rate of 20 per cent, 40 per cent or 45 per cent on pension withdrawals too.
For a 45 per cent taxpayer this represents a 67 per cent tax rate – and as withdrawals from the unused pension pot will be added to other income, some taking larger sums may find themselves tipped into this top tax band.
It could go even higher in some instances, as the tapering of the residence nil rate band down to nothing on estates worth £2million-plus would mean an effective tax rate of 70.5 per cent.