Autumn Budget 2024: bringing pensions into the scope of IHT
The Chancellor announced in her Budget Speech that from April 6, 2027, unused pension funds and death benefits will be included within a member’s estate for inheritance tax (IHT) purposes. Scheme administrators will be liable for reporting and paying any IHT due to HMRC, and a technical consultation has been published on how this would work, including information and reporting requirements for personal representatives and scheme administrators. That consultation closes on January 22, 2025.
In terms of the bigger picture, details of the proposal are limited but the policy intent is to remove the opportunity for individuals to use pensions as a vehicle for estate planning, using other funds as income and passing on unused DC funds tax-free. To achieve this, unspent (DC) pots will be brought into the scope of IHT, affecting around 8% of estates each year. However, papers published alongside the Budget make clear that this will also apply to lump sum death benefits – for example, death in service benefits from a DB scheme. In private sector occupational DB schemes trustees generally have discretion as to who receives a lump sum of this type, although members may provide an expression of wish form which can be taken into account. As that expression of wish is not binding, the lump sum falls outside the member’s estate for IHT purposes. However, some public sector schemes (for example, the NHS and judicial schemes) are non-discretionary, so that any such lump sum is already treated as falling within the member’s estate. The government views this as ‘a distortion’.
Other DB lump sums will also be affected by the proposals, including pension protection lump sum death benefits and trivial commutation lump sum death benefits. The changes will apply to UK registered schemes and Qualifying Non-UK Pension Schemes (QNUPS). However, the government states that ‘all life policy products purchased with pension funds or alongside them as part of a pension package offered by an employer are not in scope of the schemes in this consultation document’. In addition, some death benefits will remain outside the scope of IHT, including a dependant’s scheme pension and a charity lump sum death benefit (which is included in the estate but exempt from IHT if paid to a qualifying charity). Annex A of the consultation document sets out a number of case study examples which, among other things, make clear that where a member dies aged over 75 and payments are potentially subject to income tax in the hands of the recipient, this will remain the case and will apply to the amount received net of IHT.
After the technical consultation on processes, the government will carry out a further consultation on draft legislation for these changes in 2025. It is possible that policy matters will evolve as the changes are considered; we will keep you updated on any developments.
Read the consultation paper 'IHT on pensions: liability, reporting and payment'.
Autumn Budget 2024: overseas transfers
The other key Budget announcement on occupational pensions relates to overseas transfers. To date, the 25% Overseas Transfer Charge (OTC) on transfers to Qualifying Recognised Overseas Pension Schemes (QROPS) has not applied to transfers to QROPS established in the EEA and Gibraltar. That exclusion from the OTC will no longer apply to transfers made on/after October 30, 2024 (subject to transitional provisions). The policy reason is to ensure that individuals do not benefit from additional tax-free allowances on UK tax-relieved pension savings.
The draft legislation published alongside the policy paper provides that the amendments do not have effect in relation to a transfer that was requested before October 30, 2024 and is completed before April 30, 2025.
In addition, from April 6, 2025, the conditions of Overseas Pension Schemes and Recognised Overseas Pension Schemes established in the EEA will be aligned with OPS and ROPS established in the rest of the world (meaning that an OPS established in the EEA must be regulated by a pensions regulator in that country and a ROPS established in the EEA must be established in a country or territory with which the UK has a double taxation agreement, or a tax information exchange agreement).
From April 6, 2026, scheme administrators of pension schemes that are registered (but not necessarily established) in the UK must be UK resident.
Read the policy paper on changes to rules for overseas pensions and scheme administrators.
Read the draft legislation on changes to overseas pension rules.
HMRC: Latest Pension Schemes Newsletter
HMRC has published a short Pension Schemes Newsletter (no. 164) summarising the Budget announcements above. It also highlights that scam activity may have increased in the lead up to the Budget and asks trustees to remind members to get suitable professional advice about schemes that are marketed to them. HMRC also provides an email address to contact with details of any schemes that raise concerns about potential scam activity.
Read HMRC’s Pension Schemes Newsletter
PPF: bespoke discount rate for smaller schemes on s142 valuations
The Pension Protection Fund (PPF) recently consulted on proposals to allow marginally overfunded smaller schemes to use a bespoke discount rate for certain valuations during the PPF assessment period. Use of a standard discount rate for schemes with less than GBP50 million in section 143 liabilities may lead to the buy-out price for those schemes being underestimated, such that they have difficulty obtaining affordable buy-out quotes and may end up re-entering the PPF. The PPF has now announced that the new assumptions guidance took effect for valuations with effective dates on or after May 31, 2024 (its full response was delayed due to pre-election restrictions).
Read the PPF consultation response.
