Bereaved families face an ‘impossible’ six-month deadline to stump up inheritance tax on pensions or face penalties under new Government plans, warns a House of Lords report.
Family members could start to refuse the crucial role of winding up an estate when a loved one dies for fear of becoming personally liable for tax, the Lords also say.
Their report accuses the Government of placing a ‘huge’ burden on relatives due to its raid on pensions, which will be drawn into the inheritance tax net from spring 2027.
The bereaved will have to deal with contacting all the pension providers, getting valuations for each pot and reporting those sums to HMRC to determine if a tax bill is due – all within six months of losing their loved one.
The Lords report calls on the Government to temporarily extend the inheritance tax deadline to a year for pension assets.
Families have to pay interest on unpaid inheritance tax bills at an eye-watering rate of 7.75 per cent.
Deadline: You get six months – starting 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
The Lords believe a later deadline will give executors and administrators of an estate – known as personal representatives – more time to sort out loved ones’ retirement pots and allow pension schemes to update their processes.
They also want the Government to introduce a ‘safe harbour’ from late interest payments when representatives can show they took reasonable steps to try to meet deadlines and delays were outside their control.
‘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,’ says 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.’
Inheritance tax is levied at 40 per cent on estates above a certain size.
Estates passing to a spouse or civil partner are exempt, so families often have to work out and declare when tax is due when the second parent dies.
You get six months – starting 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.
Burden: The bereaved will have to deal with contacting all the pension providers, getting valuations for each pension pot and reporting to HMRC to determine if a tax bill is due
If no money is due, you get 12 months leeway to fill in the forms to show nothing is owed. But you have to settle this issue with HMRC before being granted probate to gain control of the deceased person’s funds.
An estate must be worth more than £325,000 if you are single, or £650,000 jointly if you are married or in a civil partnership, for your beneficiaries to have to pay inheritance tax.
The residence nil-rate band ups the threshold by £175,000 each – so £350,000 for a couple – when leaving a home to direct descendants.
Investigating the Government’s Finance Bill, the Lords shared fears 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.
Lord Liddle, chair of the Finance Bill sub-committee in the House of Lords, says: ‘We are particularly concerned about the impact these changes will have on personal representatives administering an estate at a time of grief.’
Rachel Vahey, head of public policy at investing platform AJ Bell, adds: ‘These new rules will 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.
‘More changes are needed if we are to spare grieving families administrative pain and distress.’
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Bereaved families face ‘impossible’ deadline to stump up inheritance tax on pensions