Peers back extended bereavement payments but seek clarity on tax impact

The House of Lords sat in Grand Committee (when the House meets as a committee but any peer may attend) to consider the Bereavement Benefits (Remedial) Order 2022 on January 17. Under the measure the higher rate of Bereavement Support Payment (BSP), along with its predecessor, Widowed Parent’s Allowance (WPA), will be extended to surviving cohabiting partners with dependent children, backdated to August 2018.

The updated order, which previously only covered couples who were married or in civil partnerships, now also includes unmarried partners who were pregnant on the date of their partner’s death and follows input from the Joint Committee on Human Rights and the Low Incomes Tax Reform Group, which provided a briefing on the proposals.

WPA was introduced in 2001 to replace Widowed Mother’s Allowance, and entitled bereaved husbands, wives and civil partners eligible for Child Benefit a payment of up to £126.35 a week. It was in turn replaced by BSP in April 2017, which provides a higher rate for those with dependent children of a lump-sum of up to £3,500, and up to 18 monthly payments of £350.

Viscount Younger of Leckie, Parliamentary Under-Secretary of State for Work and Pensions, said the system of bereavement support had been updated as previous rules were “based on outdated assumptions, complex to understand and administer, and could be unfair to claimants”.

He said the revamp to bereavement support which saw BSP introduced in 2017 had made it much easier to claim and extending the scheme further to include cohabiting couples with children would amend the current legislation, which “discriminates between children on the grounds of the legal status of their parents’ relationship”.

The minister acknowledged the extended scope could result in more complex claims, as it would involve couples in potentially complicated personal arrangements. This could include cases where more than one person claims for the same deceased partner, such as those who lived between two households or had more than one partner. He said payments will be restricted to one claimant, determined via a “hierarchy” of the “most established” relationship.

Other members of the House welcomed the changes but questioned how potentially large backdated payments would be taxed and, importantly, how resulting tax liabilities would be communicated to claimants and collected.

Conservative peer Baroness Altmann – herself a former DWP minister – said while BSP is exempt from tax, WPA is not, so those who receive substantial backdated payments of the latter could also find they have sizable retrospective tax bills. She called for the DWP to work alongside the Treasury to identify and advise those who may be affected on their tax liabilities. She said the changes enjoyed “unanimous support” and thanked the Low Incomes Tax Reform Group for its briefing.

Shadow minister Baroness Sherlock (Lab) also highlighted the LITRG briefing, which suggested that payments could be made either net of tax or with an amount reserved back for the tax. This would help protect claimants from later ending up with large tax bills they were unable to pay.

She said: “I read the very interesting briefing from the Low Incomes Tax Reform Group. It pointed out that the plan seems to be to pay lump sums gross rather than net of tax, so the obligation then rests on the claimant to pay the backdated tax. Will they be told what is payable and which tax year it applies to? Many of those people will not have an accountant or any way of understanding this, but they need to know how much of this lump sum to keep to give to the taxman down the line, rather than spending it and then finding themselves even worse off.”

Sherlock, who prior to entering the Lords was Chief Executive of the National Council for One Parent Families, also questioned the issue of “overlapping benefits”, where claimants may have received another benefit and are being deemed ineligible for widowed parent’s allowance, and whether this would be offset against backdated WPA.

Lord Davies of Brixton (Lab) wondered how the new payments would affect tax liabilities among pensioners, many of whom could see their pension incomes pass the personal allowance threshold as a result of the allowance freeze. He said: “More and more pensioners are going to be dragged into the PAYE system on relatively limited amounts of non-state pension income, which will have to be used to pay the tax, potentially, on their state pension. I think this is going to be a growing problem.”    

Another issue raised by members of the House was how to establish cohabitation. Davies suggested aligning with existing practices for other taxes: “Most rules applied in the social security sphere about cohabitation tend to be there to take away benefits rather than grant them. If there is a separate set of rules, is there a possibility that it will work against the individual at both ends?”

Sherlock added: “The Department for Work and Pensions has established practices to decide whether someone is cohabiting. the assumption is that in plenty of cases there was no formal evidence, such as a shared rent book or shared bills, yet people were held to be cohabiting when in fact they were being given benefits as a single parent.”

Baroness Brinton (Lib Dem) asked how the payments would apply to kinship carers, those who look after another person's child on a full-time basis. She said she and her husband were kinship carers for the children of a friend who died in the early 2000s, and that family members who take on responsibility for children after a parent has died or is otherwise unable to care for them are often forced to leave work but aren’t entitled to benefits as they are “not typical family carers”.

“Even though they may have had to go through the fostering approval process, as we did, because the courts need to be satisfied that they are capable of looking after and taking responsibility for the children, they are not entitled to foster payments because they are regarded as kinship carers,” said Brinton. “There is a real injustice here for this group of kinship carers, whose identification is confirmed by the courts and other benefits but who would not be eligible under these arrangements unless they were living in the same house.”

Former Speaker Baroness Hayman welcomed the reforms, saying she had been contacted in 2020 by a woman branding the previous rules “unfair” after she was deemed ineligible for the support when her partner passed away, leaving behind their young son, because they were not married. Hayman said the woman would be “deeply grateful” for the changes.

She questioned how those who have become eligible for the payment will be informed. She said: “The lady who got in touch with me decided to take a parliamentary route so has obviously seen every twist and turn and will know to apply, but there must be many people who simply accepted that they were not eligible and had no idea that this whole debate was going on.”

Responding to the debate on the matter of tax and benefits interactions, the minister confirmed that backdated WPA would be taxed. On the issue of tax credits he said: “WPA will be treated as income for tax credit purposes, as is common practice for social security benefits. It will be assessed in the year of payment rather than in the year of entitlement, so no adjustments to past years will be needed. Only WPA is taxed and is a legacy benefit; it can be paid only for deaths before April 2017.”

He suggested that, for the purposes of Universal Credit, a common sense approach would be taken when considering the deprivation of capital rules as regards claimants’ use of their lump sum awards. “We have a duty to ensure that means-tested benefits are paid to those who most need them, while also ensuring fairness to the taxpayer. Provided any capital is spent reasonably, and not with the purpose of accessing or getting more benefit, claimants should not be treated as having notional capital.”

Turning to the issue of raising awareness amongst claimants who may not previously have been eligible for bereavement benefits, the minister said the Government would be “taking a range of steps” to raise awareness of the new order, including updating its website, using existing DWP communication and working with external organisations. However, he said, while people who had previously claimed and been refused the benefit on the basis of being in a cohabiting relationship would be able to apply again, with an extended time period beyond the standard three months, they would not be contacted directly, as it was not standard practice to keep contact details.

He added that existing DWP IT systems would be used to verify cohabitation. Where verification via DWP data is not possible claimants may be required to provide two forms of other evidence, such as bank statements or utility bills, or a declaration over the phone. He explained: “The onus will be on the claimant to prove cohabitation. We believe that this is a pragmatic and compassionate approach which minimises the impact on the claimant, is deliverable and protects against the risk of fraud.

“Ultimately, in areas of extreme complexity, where it is not possible for the department to make a definitive decision, it will go up to the Secretary of State,” he said. “Some of these relationships are very complex. Obviously, our aim is to ensure that we look after all those who apply in the best possible way, taking account of the different complexities.”

The motion was agreed by the House. The Order will be debated by MPs in committee on Tuesday 24 January.