Lords inquiry: Government acknowledges increased burden from IHT changes

Witnesses

• Dan Tomlinson MP, Exchequer Secretary to the Treasury
• Oliver Haydon, Deputy Director, HM Treasury
• Christopher Stewart, Head of Pensions Tax Policy, HMRC

Policy intent and design

The committee asked about the pension proposal saying: “you have a problem of unused pension pots that you want to tax. Was the automatic assumption that this should be done through inheritance tax… or were there alternatives considered for taxing unused pensions”?

Responding to the question, Dan Tomlinson said that the key objective of the change in policy was to make sure that “the incentive to put money into a pension was around people saving for their retirement, and to make sure that… pensions were [not] becoming the place that people turned to… so that they could pass on a maximal amount… after they died”. IHT was the “main option” on the table he said.

Tomlinson continued that “when you are trying to think about your tax policy… you treat different forms of either income or assets in the most similar way that you reasonably can”. He disagreed with Lord Leigh of Hurley (Con) that the government’s choice was “retrospective taxation”, explaining that the change is not coming into place until 2027.

Responsibility shift: PSAs to PRs

Asked about the government’s decision to move from pension scheme administrators (PSAs) to personal representatives (PRs) Tomlinson highlighted that “in lots of cases, personal representatives end up having to administer the estate”. Christopher Stewart explained: “This is something that we understand better than we understood the PSA‑led model… because it is building on an existing process.”  He continued that there are tools that HMRC makes available to personal representatives who are not professionals to try to help them to administer estates effectively. 

The committee voiced concern about the complexities and burden for PR(s) to which Stewart acknowledged the increased burden but said the changes will allow personal representatives to exert more control over the pension. He added: “They will now be able to direct pension scheme administrators to hold back some funds… and… they would not be able to withhold payments to exempt beneficiaries like spouses or civil partners.”

Asked about safeguards for PRs if they get things wrong, Stewart said: “Personal representatives… will be able to apply to HMRC for… clearance, which will effectively clear the personal representative of being liable for any future pension that is uncovered.”

Baroness Fairhead (Cross Bench) pressed Stewart on whether the government’s consultation had given PRs – especially lay PRs – as loud a voice as pension schemes. Stewart replied that he took the point that it may be more difficult for lay PRs to be heard in these consultations. He said the government “spoke to groups such as the Chartered Institute of Taxation and the Low Incomes Tax Reform Group in advance of making these changes, so we did hear some views from lay PRs, if you like.”

Treatment across different schemes and dependents

The committee enquired about the policy justification for IHT treatment across different types of pension schemes, to which Tomlinson replied that “whether your scheme is a defined benefit or a defined contribution scheme, these changes apply equally… with some very limited exceptions.” Stewart intervened to say that the schemes pay out slightly different benefits, “but we have tried to make the inheritance tax treatment align between them as closely as possible”.

Baroness Bowles of Berkhamsted (Lib Dem) challenged the responses while asking about the beneficiary side of things. In response, the minister said “within the defined benefit schemes there are… sub-parts of… which can allow money to be passed on”. He continued: “The government’s view is that bit of the defined benefit scheme is not there primarily for tax planning reasons”.

On dependants’ provision, Stewart highlighted that “dependants’ scheme pensions [are]…  typically paid from a DB pension scheme that will not be in scope of inheritance tax.”

Asked about balancing the fairness between the two schemes and encouraging people to contribute more, Tomlinson argued that the government has £70 billion of tax relief that goes into the system to support people to save for their retirement. Stewart added that “the income tax reliefs for contributions to and investment growth within a pension are unchanged” by the measure.

Lord Leigh asked if figures consider both inheritance tax and income tax effects when withdrawing from defined contribution compared to defined benefit schemes. Stewart replied that the figure reflects gross relief on contributions, not exit taxes, adding: “Withdrawals from defined benefit schemes are subject to income tax in the same way as withdrawals from defined contribution schemes.”

APR and BPR: impact and valuation

Turning to the changes to APR and BPR, Lord Leigh raised the issue of businesses with a value greater than £1 million the day before death (when they are valued) but which will be reduced the day after death due to the death of the proprietor. (“When a key person dies, the business is worth less,” in the words of Baroness Bowles.) He asked how many such businesses there are.

Oliver Haydon replied that this is not a new issue as all business assets have to be valued at current market value in going through the process of achieving probate: “There is a standard way in which to value a business that is unchanged by these reforms”

Leigh said it has not mattered for CGT because it is “just a number that is only relevant in a subsequent sale, which could be decades off. But it is very relevant for this purpose because it affects the amount of cash the estate has to pay out, which invariably the estate will not have because, for most families, the single largest asset by a long way will be the family business.”

The minister replied that he will get back to the committee about it, while highlighting that there are numbers available on the estates that would be affected on the APR side.

On the issue of businesses being valued on book values, Haydon said: “The basic story here is that the long-standing position has been that personal representatives must provide the market value for all of these assets. One reference in an older version of HMRC’s guidance said that there was no need to adjust the book value in cases where a business attracted the 100% rate of relief. However, that was never the law… which has since been corrected”.

Discussing more broadly the differing estimates of the impact of the changes, the Exchequer Secretary reported that “the challenge with the data is that… the analysis informing this policy was from the early 2020s. On the lag in the system, in terms of when people have to report, they have 12 months to send the relevant form to HMRC for it to get into our system. This means that our current estimate is that the analysis on the 2026-27 tax year will not be able to happen until 2029”.

He further defended the government's numbers, stating that “the data… was from actual claims to HMRC… around 520 additional estates… now fallen to… around 370 or 375… around half of that is due to the policy change.”

On the impact of the policy on elderly farmers who have not had a chance to do any tax planning, Tomlinson recognised that the changes will be “more difficult” for these groups but believed that the government has “got the balance right in terms of both the higher allowance and the lower rate”.

In relation to business assets held in pensions (e.g., SIPPs/SSAS), Stewart said that “the nature of the assets held within a pension scheme is not relevant. It is the rights to the pension… rather than the underlying assets.”

Six-month deadline and payment mechanics

Asked if the six-month deadline for payment remains appropriate, the minister answered: “People have the option to put a payment on account… use the direct payment scheme… pay in instalments… In the most extreme circumstances, you can take a grant on credit.”

Haydon added that there is no penalty for not filing after six months, elaborating that “what happens from that point is that interest accrues at the standard HMRC rate of 8%... That is not designed to be punitive but to represent the fact that there is an incentive for HMRC to be paid, and the period of time for when you have not paid HMRC the amount is a kind of recompense”.

Baroness Fairhead (Cross Bench) urged the minister to look at whether six months is “an appropriate period”, highlighting arguments that six months is a “very short time, given probate, complexity and HMRC’s response time”.

Haydon pointed out that if it is an APR or BPR asset, the individual can pay over 10 years, and it is interest‑free over that period. In regards to upfront payments he explained: “if you have a reasonable assessment of what you think your eventual IHT liability will be, even if HMRC has not fully processed it or you have not finalised the valuation, thanks to payment on account, you have the option of paying that to HMRC ahead of the six-month period, which will mean that, if the amount you put on account is equal to or exceeds the eventual liability, you do not pay interest”.

Tax policy principles and DOTAS offence

Explaining the new tax policy principles and a more flexible engagement model, the Exchequer Secretary said the government “are trying to make sure that we can move to a place where there is a less formulaic, one‑size‑fits‑all approach”. He added that “there is no duty to consult on tax policy changes… but we should do so on the relevant bits where it is appropriate.”

On the proposed new offence of DOTAS non-notification, he said that the government is not proceeding with the proposed changes, adding that: “Of the changes that were in the Budget, the one that… will have a significant impact is the introduction of a universal stop regulation…There will be new criminal offences for those promoters who do not apply”. Tomlinson also touched upon other changes that are coming forward, including a promoter action notice, which will require businesses to stop providing goods or services to promoters.

You can read the full transcript here.