Tax on pension pots ‘unworkable’

Jacob Grattage, Reporter, Business & Accountancy Daily, Croner-i

Executors of estates will be placed in an untenable position and face ‘unmanageable’ risks if current plan for taxing pension pots goes ahead, Lords told.

Witnesses from law firms and professional bodies told Lords committee the government’s proposals were ‘unworkable’ as there was not enough time to pay the tax within HMRC’s rigid six-month deadline.

At a House of Lords Finance Bill Sub-Committee, chair Lord Liddle asked about the risks for personal representatives (PRs) who are responsible for administering estates.

John McArthur, member of the technical committee for the Society of Trust and Estate Practitioners (STEP) said: ‘The risk seems to be all on the PRs and executors, not with the pensions scheme administrators (PSAs), that is a big issue.’

Ian Bond, member of the wills & equity committee for the Law Society said: ‘Where PRs are going to be liable for inheritance tax on unused pensions, but they don’t control the asset, this is going to put a lot of people off from wanting to be PRs or executors named in wills. PRs will have to have a long think whether they want to be in the role.’

There were also concerns about the complexity of the proposed IHT system.

Annie Pearson, member of the tax law sub-committee for the Law Society of Scotland said: ‘Additional administrative burden on PRs, the difficulty on balancing competing interests of estate beneficiaries versus pension beneficiaries, will make the route to PRs extremely unattractive’

Lord Leigh then addressed the IHT payment deadline issue particularly for pensions scheme administrators.

McArthur said: ‘Six months is a short period of time when you start with a blank sheet of paper to then bring everything together.

‘There is a big learning curve for PSAs to deal with this, and that may be problematic between the interaction with PRs and PSAs in working out the inheritance tax, let alone raising the money to pay the tax within six months.’

Bond replied: ‘This is not a quick process, when the inheritance tax clock starts ticking interest rates start to apply if you do not pay inheritance tax within six months, layering on pension means it’s an incredibly tight window and it’s going to be incredibly difficult.’

Baroness Fairhead asked about personal liability for personal representatives: ‘The government is suggesting in most cases the PRs should pay any pension related inheritance tax from the estate asset and then claim it back from the beneficiaries, what are the risks for PRs what is their personal liability?’

Bond replied: ‘People rarely die tidily, people who pass away rarely expect to do so, things are not in order, that’s including assets and liabilities.

‘Now layering on the fact of saying you are applying this to deceased pensions, and they may not just have one you can have an average of eight to 10, you have to start looking and collecting, the onus is on the PR to go and look for this. There has to be help from the pension industry.’

On the issue of PRs paying the IHT on pensions, Bond warned: ‘There’s an unsavoury suggestion saying there will be a growing market for inheritance tax loans, whereby a tax bill will be due and the estate will not have the assets to pay, they will look for open market loans and personal liability to the PRs.’

Lord Leigh asked the panel if there was a problem with solicitors acting as advisors for PRs.

Bond said: ‘Not everyone’s PR can write wills, we will have to explain a lot more to the clients, firms will have to explain to PRs the personal liability that they will be taking on.’

On the pension beneficiaries Bond also stressed that it is not only the immediate family that inherits, it can be charities and any number of individuals.

 ‘It is not just the assets in the estate, it’s the pension, which you may as the PR find that there is some guidance or letter that says it is not coming to anyone within the estate,’ he said. ‘You’re going to have to take on responsibility for somebody else potentially benefiting.’

Pointing to higher costs and the admin burden, Pearson said: ‘The additional administrative burden will have to be paid from somewhere, if it becomes unviable for firms they will drop out of the marketplace.’