Labour's Pension Reform Plan to Bring Inheritance Tax Complexity and Burden to Bereaved Families

Labour's plan to bring unspent pensions into a person's estate and add them to the scope of inheritance tax from April 2027 will force grieving families to navigate a complex and confusing administrative process. Personal representatives, or executors, will be responsible for calculating and paying any death duties owed to the taxman, a task that was previously expected to fall to pension providers. Industry experts warn that this move will add significant complexity and confusion to an already difficult time for families.

Key Takeaways:

• Personal representatives will have to track down the deceased's pension pots, contact the schemes, collate the information, and use an online calculator to work out how much tax is owed.
• Probate cannot be granted until this process is completed, leaving beneficiaries administering an estate at risk of fines if they fail to pay inheritance tax by the six-month deadline.
• Families currently receive their late relative's pensions free of inheritance tax, with income tax due if the person died after age 75.
• Under Labour's plan, the family of someone dying over the age of 75 could see their inheritance reduced by death duties of 40pc, and then pay income tax on the remainder.
• The added administrative burden for personal representatives was announced in HMRC's technical consultation on the Chancellor's pension changes.
• Death in service benefits payable from a registered pension scheme will remain out of scope of inheritance tax, a decision that was welcomed by industry experts.
• Labour's plan aims to raise around £1.5bn a year by 2029-30.
• HMRC has admitted that the decision will cause a "significant operational resourcing impact" and industry experts warn that complications will arise where families cannot track down all of the deceased person's pensions or where providers are slow to supply the information needed.

Statistics:

• 90pc of estates each year will continue to pay no inheritance tax after Labour's changes to pension tax rules (Source: Treasury spokesman).
• The added administrative burden for personal representatives will raise significant complexity and confusion (Source: Rachel Vahey, AJ Bell).
• 40pc death duty tax could be levied on the family of someone dying over the age of 75 (Source: Treasury spokesman).
• £1.5bn per year is the estimated revenue raised by Labour's plan (Source: Treasury spokesman).
• 7.5pc to 9pc is the raise in HMRC's late payment interest charges announced by Rachel Reeves (Source: Article).

Sources:

• HMRC's technical consultation on the Chancellor's pension changes (mentioned in Article).
• Treasury spokesman (mentioned in Article).
• Steve Webb, former pensions minister and partner at LCP (mentioned in Article).
• Rachel Vahey, of wealth manager AJ Bell (mentioned in Article).
• Madeleine Ross, Money Reporter (mentioned in Article).
• Mattie Brignal, Senior Money Reporter (mentioned in Article).