Murray Beith Murray LLP is a leading Scottish private client law firm.
For 175 years we have specialised in meeting the legal, financial and administrative needs of individuals and families, family trusts, charities and private companies.
Murray Beith Murray LLP is a leading Scottish private client law firm.
For 175 years we have specialised in meeting the legal, financial and administrative needs of individuals and families, family trusts, charities and private companies.
In the recent Autumn Budget 2024, it was announced by the Government that measures will be put into place to reform the Inheritance Tax treatment of pensions. From 6 April 2027, unused pension funds will be included within the value of a person’s estate. These changes will affect both UK registered pension schemes and Qualifying Non-UK Pension Schemes.
Currently, Executors, sometimes known as Personal representatives (PRs) are liable for reporting and paying any Inheritance Tax. PRs have legal responsibility to ingather information and settle the deceased’s estate, which can pose liquidity problems.
The majority of UK registered pension schemes are discretionary pension schemes and are currently beyond the scope of Inheritance Tax. In contrast, a small group of pension schemes, known as non-discretionary schemes, are already treated as part of an individual’s estate for Inheritance Tax purposes, for example NHS and judicial schemes.
What does this mean for a pension scheme member who dies after 6 April 2027? If a pension scheme member dies with unused funds or without having accessed all their pension entitlements, any unused funds will be added to their estate for Inheritance Tax purposes. Therefore, the present-day distinction between discretionary and non-discretionary schemes will be eradicated and only specific pension benefits will continue to fall outside the parameters of Inheritance Tax. This includes instances where funds can only be used to provide a dependants’ scheme pension, which are currently out of scope in non-discretionary schemes thus remain out of scope under this change.
The new measures will require a new approach to reporting and paying Inheritance Tax. From 6 April 2027, the liability of reporting and paying any Inheritance Tax due on used pension funds will be the responsibility of the Pension Scheme Administrators (PSAs). PSAs and PRs will need to liaise with each other, including PRs informing PSAs of a member’s death, PSAs sharing details of unused pension funds and PRs calculating and sharing how much Inheritance Tax nil-rate band should be allocated to the relevant pension. PSAs must use the information they have been provided to calculate the amount of Inheritance Tax due on the unused pension funds then report and pay this to HMRC within 6 months following the month of death of the deceased. After this, interest will be incurred on the balance due.
The new approach draws comparisons to the approach already taken in respect of Inheritance Tax that is due on funds held in certain trusts, for example Qualifying Interest in Possession trusts. For example, in most cases, the Inheritance Tax ‘nil rate band’ will be apportioned between the deceased’s pension assets and non-pension assets. The costs incurred with administering an estate will inevitably increase due to the rise in administrative work.
There is also a risk that Pensions might face double taxation in cases where the pension holder dies on or above the age of 75 years with unspent pension funds. This is because inherited pension funds might be subject to Inheritance Tax at 40% and also Income Tax as soon as the pension funds are withdrawn.
The Government has already launched a consultation in relation to technical aspects of these significant changes and more details are expected in due course. For now, it becomes critical to review pension arrangements as part of general succession planning.
This article was written in conjunction with Trainee Solicitor, Anastarsia Moffat.
Private Client Partner, Andrew Paterson, specialises in tax and succession and estate planning. Andrew also heads our Executry group.
If this article has raised any questions or you would like to discuss your affairs, then please complete our contact form or call us on 0131 225 1200.
Murray Beith Murray LLP was established in 1849, as advisors for generations of clients, committed to our values of integrity, expertise and trust. This aim and these values continue to this day, as does our commitment to be here when you need us.
