Major Changes to Death Benefits and Inheritance Tax: What You Need to Know
The UK government has announced important changes regarding the taxation of death benefits from registered pension schemes, effective from April 6, 2027. This article will break down these changes, their implications, and how they may affect members of pension schemes, employers, and trustees.
Understanding the Proposed Changes
Current Situation
As of now, most death benefits distributed from registered pension schemes are excluded from a deceased member’s estate for inheritance tax (IHT) purposes. However, this is set to change with the announcement made during the Autumn Budget 2024.
New Inheritance Tax Rules
From April 6, 2027, the following key changes will be implemented:
- Most death benefits from registered pension schemes, including both Defined Benefit (DB) and Defined Contribution (DC) schemes, will now be included in the deceased member’s estate for IHT purposes.
- Pension schemes will be responsible for reporting and remitting any IHT owed on these death benefits.
Impact on Death Benefits
According to the latest proposals:
- In-Scope Death Benefits: Most death benefits will be subject to IHT, with exceptions being:
- Dependants’ pensions – Payments made to a dependant (like a spouse or child).
- Death in service benefits – These are now exempt from the IHT requirements, a notable shift from prior treatments where non-discretionary death in service benefits did incur IHT.
While the consultation indicated that charity lump sum death benefits would also remain outside the scope of IHT, the draft legislation currently does not reflect this. It may be an oversight that the government aims to correct in the final draft.
Key Responsibilities for Reporting IHT
One significant change is who bears the responsibility for reporting and paying IHT:
- Personal Representatives (PRs) of the deceased member will now manage the reporting and payment obligations for IHT on death benefits. This shift alleviates much of the burden from pension schemes.
- However, beneficiaries receiving death benefits that incur an IHT charge of £4,000 or more will have the option to instruct the scheme to pay the tax on their behalf. Schemes may also opt to offer this facility for amounts below £4,000.
Information Sharing Requirements
To facilitate compliance, new provisions will mandate PRs and pension schemes to exchange necessary information. This aspect will be subject to further consultation to establish the specific requirements.
Implications for Schemes, Members, and Employers
For Pension Schemes
The pivot to PRs responsible for IHT liabilities significantly simplifies compliance for pension schemes. However, schemes will need to adjust their processes and communications surrounding the distribution of death benefits in anticipation of these changes.
Recommendations:
- Stay updated with government publications regarding new information-sharing requirements.
- Consider reaching out to members to inform them of these changes and emphasize the importance of updating their death benefit nomination forms, especially since IHT could apply to less common payouts.
For Employers
The exemption of death in service benefits from IHT under the new rules indicates that employers likely won’t need to alter how they provide these benefits, ensuring a level of stability in their offerings.
Conclusion
As these changes approach, it is crucial for all parties involved—schemes, members, and employers—to stay informed and prepared for the new obligations related to inheritance tax on pension death benefits. Clear communication and proactive measures will be vital in navigating these updates successfully.
By understanding and adapting to these regulatory changes, you can ensure compliance and maintain the integrity of your pension schemes moving forward.
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