The Labour government's current deadline for inheritance tax payments on unused pension funds is creating a significant crisis for UK households and estate administrators, according to a stark warning from a cross-party group of peers. The House of Lords economic affairs committee has urgently called for an extension of the payment period from six months to twelve, citing severe practical and financial challenges.
Unrealistic Timelines and Financial Pressure
In a report published on Wednesday, the committee highlighted that the existing six-month deadline poses a "huge problem" for personal representatives handling estates. This tight timeframe is particularly problematic given the complexity of modern pension arrangements, where individuals often hold multiple pension pots. The peers argue that extending the deadline to twelve months would provide a more realistic window for diligent executors to comply without facing punitive consequences.
Risk of Late Payment Interest and Probate Delays
The Lords report detailed several critical risks associated with the current policy. It warned that the stringent timeline could delay the grant of probate and subsequent payments to beneficiaries. More alarmingly, it exposes estates to high rates of interest on late tax payments, even when personal representatives are acting in good faith and with due diligence. This situation places an unfair burden on those managing estates, potentially making them liable for taxes on assets they cannot immediately access or control.
Labour peer Lord Roger Liddle emphasised the administrative turmoil, stating, "There are serious worries for people on the administration side. All of this might get quite messy and put individuals in a position where they can’t pay the tax on time and are liable for the very high rate of interest you have to pay on late tax." He further noted the urgency, adding, "There’s only a year to get these systems sorted . . . it’s a huge problem as a lot of people have multiple pensions now."
Major Shift in Pension and Inheritance Tax Policy
This issue stems from a significant policy change that brings pensions within the scope of inherited estates for inheritance tax purposes, overturning long-standing tax arrangements. Historically, wealthier individuals have utilised pension savings as a strategy to pass on wealth without incurring inheritance tax. The new rules mark a dramatic shift, affecting these common estate planning methods and introducing new complexities for executors.
Government Plans Under Scrutiny
The committee's intervention comes amid criticism of the government's handling of the policy rollout. Lord Liddle pointed out inconsistencies, remarking, "The government produced a plan which they then had to change and they now have to change it again." This suggests a need for more stable and well-considered legislative frameworks to avoid placing undue stress on households and those administering estates.
The report concluded that the proposed extension to twelve months is essential to mitigate cash flow pressures and reduce the personal risk for individuals acting as personal representatives. It advocates for a system that supports rather than penalises those navigating the intricate process of estate settlement in the context of pension reforms.
