Nigel Sloam & Co Actuaries and Consultants and NSS Trustees Limited's Response to the HMRC Technical Consultation Inheritance Tax on Pensions: Liability, Reporting and Payment
1. Introduction
Nigel Sloam & Co is an independent firm of Actuaries and Consultants established in 1979 and is regulated by the Financial Conduct Authority (‘FCA’) and the Institute and Faculty of Actuaries (‘IFoA’).
The firm has been involved in providing actuarial, trustee, administrative and consultancy services to all types of pension arrangements and has a particular expertise in respect of discretionary trust-based UK HMRC Registered (formerly ‘Approved’) Pension Schemes, many of which are “member directed”.
Another company in our group, NSS Trustees Limited, which is separately authorised by the FCA, acts as both a Self-Invested Personal Pension (‘SIPP’) Operator and as independent trustee of many occupational pension schemes.
Our response below is produced to include input from both firms, in the light of our long experience. We appreciate and thank you for the opportunity to contribute to this process.
2. Executive Summary
- We have grave concerns about many significant practical issues, raised by the Budget proposals, which we believe will hamper severely the necessary and proper use of trustee discretion as well as creating a real and indeed huge unfairness between beneficiaries of defined contribution pension schemes (now the modal pension format in the UK) and beneficiaries of defined benefit pension schemes.
- The problems will arise from the attempt to integrate death benefits from trust-based pension schemes, where there is discretion, into the current Inheritance Tax (’IHT’) regime. We believe and recommend that Government Policy would be better achieved if there was a parallel Pensions Inheritance regime.
- The contents of the Consultation Document would appear to have overlooked the variety of assets that have been acquired in pension schemes, many of which havefinanced and continue to finance UK economic growth, often when alternative finance was unavailable.
- Specifically, the current proposals have not taken account of the relatively illiquid nature of many pension scheme investments. For example, loans to private companies, investments in private equity and commercial property which have stimulated the economy are commonly found in pension schemes and cannot be easily realised within 6 months. In addition, other investments including NS&I products, ‘unbreakable’ cash deposits, and many collective investments may not be realisable within a relatively short period.
- A 6-month deadline on pension funds to pay over IHT may a) be impossible to achieve, b) result in penalties for beneficiaries of the deceased (and possibly lower tax revenue) and c) impose penalties on other members of the scheme who have not died and who benefit from assets held under common trusts. In addition, there will be valuation problems.
- Trustees and Scheme Administrators are obliged to take account, when paying discretionary death benefits, of the financial circumstances of potential beneficiaries. From long practical experience, we know that this information is not readily available. In these circumstances, it is unfair and unreasonable to impose a 6-month payment requirement. Based on experience, we believe that 2 years is a reasonable time frame.
- We do not believe that it is appropriate or practical for the Pension Scheme Administrator (‘PSA’) to have the responsibilities set out in the consultation document in respect of Inheritance Tax – certainly within a 6-month timescale. We believe that it would be better if there was a separate Pension Inheritance Tax regime with the PSA responsible to make payments within two years.
- Under the current IHT regime, legal personal representatives may pay IHT over a ten- year period, where there are illiquid assets such as property. We believe that similar facilities should be granted in respect of similar pension assets.
- We also believe that it is unfair that prime beneficiaries, who are neither married nor in a civil partnership with a deceased member of a defined contribution pension scheme will be disadvantaged on that member’s death by the proposed changes. This is in contrast with the position that will apply to such people in defined benefit schemes – and is grossly unjust.
- Similarly, we are also concerned at the unfairness of treatment that will arise on the death of a member of a defined contribution scheme, for financial dependants such as young children. The proposal implies that whereas pensions paid to children of members of defined benefit schemes will not be subjected first to IHT, the children of members of defined contribution schemes will have their benefits so reduced. We believe and recommend that there should be uniform treatment.
- Parliament over years has encouraged and provided tax reliefs on pension contributions, specifically to facilitate the payment of pensions to scheme members in retirement and to their dependants thereafter. The current proposals will affect seriously the ability to provide dependants’ pensions from defined contribution schemes and we would highlight that there is a difference between providing dependants’ pensions and simply giving a bounty on death.
- We are also concerned that the imposition of Inheritance Tax in the manner suggested currently may lead to residual pension benefits being allocated for tax considerations, rather than for needs.
- It is our view that the trust nature of pension funds conflict with the extension of IHT per se to such schemes. We believe that the Government objectives would be better achieved by the substitution of a separate Pensions Death Benefit Tax regime for the proposed extension of IHT. If this suggestion was accepted, then tax collection could operate utilising the existing Real Time Information (‘RTI’) system.
3. Consulation Response
Question 1: Do you agree that PSAs should only be required to report unused pension funds or death benefits of scheme members to HMRC when there is an Inheritance Tax liability on those funds or death benefits?
We believe that PSAs should only report to HMRC in cases where there are both a) unused pension funds on a member’s death and b) where there is an IHT (or similar) charge. We believe that in practice it will be impossible to make such reports within a 6-month deadline from the date of death and we believe that 2 years is much more realistic.
If the Proposed tax was renamed and redevised as a Pensions Death Benefit Tax – rather than IHT – there is indeed the potential to utilise and adapt the current RTI system for reporting such, rather than creating and/or using another system.
Question 2: How are PSAs likely to respond if they have not received all the relevant information from the PR to pay any Inheritance Tax due on a pension by the 6-month payment deadline?
As indicated above, we believe that it will be impossible in many cases for PSAs to provide meaningful responses within 6 months of a members’ death. This position results from the combination of a) a lack of information from PRs and b) trustees not being given sufficient time to perform their legal duties and responsibilities in the exercise of their discretions.
A 6-month payment deadline is not realistic for Pension Scheme Administrators (‘PSAs’) who currently have a 24-month timeframe for allocation of benefits without incurring additional tax charges. We believe that the reporting period should also be 24 months. The current timeframe also commences from the date the PSA could have reasonably known of the member’s death.
As implied in our summary, pension schemes may contain assets that are illiquid and/or are partially owned by the pension scheme trustees, and which must be valued by professionals, which takes time. We would not wish the unrealistic timeframe to force PSAs to use ‘forced-sale’ valuations of such assets – or indeed move to action such sales – which would potentially disadvantage not just the beneficiaries of the deceased pension scheme member but also others with interests in such assets in common trusts.
PSAs and Trustees need to undertake detailed and extensive enquiries into a deceased pension member’s family circumstances to comply with their obligations under general trust law, as well as considering any expression of wish and nomination provided by a member during his/her lifetime – all in the context of all relevant potential beneficiaries. The current 24-month time frame allows for the best possible decisions to be made with appropriate consideration of all the circumstances. A 6-month deadline is simply insufficient and does not take account of the potential vulnerabilities of beneficiaries at a very difficult time.
If the proposed unrealistic timeframe is enforced, there is a huge risk of bad decisions being made without proper consideration and with potential harm to the interest of beneficiaries.
Question 3: What action, if any, could government take to ensure that PSAs can fulfil their Inheritance Tax liabilities before the Inheritance Tax payment deadline while also meeting their separate obligations to beneficiaries?
We believe the reporting and tax payment deadlines should be extended to 24 months. In addition, we believe that consideration should be given to a separate Pensions Death Benefits Tax regime.
The PSA may assist in settling taxes due from funds under its control – but it should not be forced to do so in a manner which will a) harm beneficiaries of a deceased member b) harm other members of the scheme and c) potentially reduce the amounts of tax.
PSAs should be enabled to spread the appropriate tax payments in respect of illiquid assets, in similar fashion to what is permitted to PRs currently under IHT.
The position of income benefits to financial dependants should, in our view, be excluded from the scope of death benefit taxation – as otherwise there will be grave injustice as compared with the position of those in defined benefits schemes.
Question 4: Do you have any views on PSAs reporting and paying Inheritance Tax and late payment interest charges via the Accounting for Tax return?
We reiterate our previous comments regarding:
- i. The need for a 24 (rather than 6-month) period
- ii. The desirability of a special Pensions Death Benefit regime.
- iii. Treatment of illiquid assets, which would compare with that under the current IHT regime.
If our suggestions were adopted then – as indicated above – it would be possible to adapt and use the current Real Time Information (‘RTI’) system for reporting such rather than creating and/or using another system.
Question 5: Do you agree that 12 months after end of the month in which the member died is the appropriate point for their beneficiaries to become jointly and severally liable for the payment of Inheritance Tax?
Once initial distributions to beneficiaries and any tax has been paid by the PSA any further tax liabilities should follow the beneficiaries and the responsibilities of the PSA should be discharged and end.
The PSA should only be liable in any event for tax on undistributed funds that remain under its or the Trustees’ control.
Question 6: What is the most appropriate means of identifying or contacting beneficiaries if either the PR or HMRC realises that an amendment is needed after Inheritance Tax has been paid? Should PSAs be required to retain the details of beneficiaries for a certain period?
We believe that HMRC and the PR should contact beneficiaries who received funds to deal with any adjustments.
The PSA will retain records under their information retention policy and requirements, but we would highlight that these details could be out of date by the time they are contacted in respect of any adjustment.
We would also highlight the additional difficulties that may arise if potential beneficiaries are or become non-UK resident – and PSAs should not have responsibilities as a result.
Question 7: What are your views on the process and information sharing requirements set out above?
It is highly unrealistic to assume that PRs will be able to come forward promptly, following the death of a member, to confirm the position of the member’s estate to the PSA. The consultation assumes that a lay PR will be aware of what is required of them.
Similarly, it is highly unrealistic to expect that PSAs and trustees will be able to ascertain the financial position of potential beneficiaries within a 6-month period. Again, it is assumed incorrectly in the consultation that potential beneficiaries are all known and are resident in the UK.
We have commented above on the need for trustees and the PSA to undertake detailed and extensive enquiries into a deceased pension member’s circumstances in order to comply with their legal obligations and the current 24-month time frame.
If the proposed much shorter timeframes are enforced, there are clearly huge risks of decisions being made without proper consideration and with potential harm to the interest of beneficiaries.
We do not see how this aligns with regulatory and fiduciary duties.
As indicated previously, we are also concerned about the position of financial dependants of a member of a defined contribution pension scheme on death. There is potential, under the current proposals, for substantial injustice vis a vis the position of dependants benefiting from defined benefits schemes. We believe that such injustice will stimulate a huge public outcry and that all financial dependants should be treated uniformly whatever the format of the pension scheme.
Defined contribution pension schemes can – and currently do – make vital payments of income to financial dependants upon the death of a pension scheme member and we are concerned about the impact of the proposals on a deceased pension member’s remaining dependants.
Question 8: Are there any scenarios which would not fit neatly into the typical process outlined above? How might we address these?
As indicated above, there appears to have been no consideration of the type of assets that may be included in defined contribution pension schemes – including certain NS&I products which have fixed terms, ‘unbreakable’ cash deposits for a specified term, ‘real’ commercial property, collective investments or funds where the investment manager has restricted the ability to encash for a period, shares in and/or loans to private companies etc – and the ability to liquidate such.
For example, a considerable number of Member-directed pension schemes include commercial property which is leased back – on a commercial arm’s length basis – to members’ own small and medium-sized businesses. The proposed changes would have significant negative consequences for small and medium-sized UK business owners who have used their own pension savings to invest in and to assist their businesses.
There also appears to be no consideration of the fact that most defined contribution schemes generally involve multiple members whose allocations within the pension scheme may be spread across several different asset classes and the time that may be required to value such assets and calculate a deceased member’s interest – and then deal with the assets in a fair way to settle the proposed new taxes.
We believe that the current 24-month time frame to deal with matters should be retained. We also believe that if Inheritance Tax is to apply to pension schemes, then any easements to deal with illiquid assets in a non-pension context should be extended to pension schemes.
Question 9: Do you have any other views on the proposal to make PSAs liable for reporting details of unused pension funds and death benefits directly to HMRC and paying any Inheritance Tax due on those benefits? Are there any feasible alternatives to this model?
We believe that the process and timeframes indicated in the consultation are unrealistic with significant risk of harm to beneficiaries and the breach of the Consumer Duty principles established by the FCA.
We believe that PSAs should only be responsible for the payment of taxes from funds under their or trustees’ control
a) Within a 24-month period of a member’s death and
b) Thereafter only in respect of undistributed funds which remain under trustees and
PSA’s control.
As indicated above, if changes are to be made, it is our view that consideration should be given to previous regimes governing UK HMRC Registered Pension Schemes in which standalone specific pension tax charges could be levied upon death rather than trying to harmonise the Inheritance Tax regime with pension funds. If this suggestion is adopted, then existing settlement and reporting systems could be used.
We believe this would significantly reduce the complexity inherent in the current proposal and allow distributions to beneficiaries and payment of appropriate tax to HMRC in a much more efficient manner.
Nigel Sloam and Arun Ramaswamy
for Nigel Sloam & Co and NSS Trustees Ltd