Webinar Pensions and IHT: advice issues and opportunities

(00:01): Good morning everyone, welcome to our latest technical session from Aegon. My name is David Kerr. I'm the Director of Platform Consultancy, and I am your host today. I'm joined by our experts,  Haggart Pension Technical Manager, and  Cruickshank, who's our Tax and Trust Manager. And today we're going to cover the topic on everyone's lips and taking up most of the column inches - IHT and pensions.  and  have tried to cover the questions that you want answers to as well as the technical content. However, if you do have a question, please type it in the q&a and we'll have time at the end. Now, we've got a number of people on the call today, so let's dive straight in. , over to you.

 (00:51): Perfect, thank you. Now, pick up any newspaper these days and you'd be forgiven for thinking that pensions are finished as an investment vehicle. So today very much we're going to look at pensions on death, not the death of pensions. We have to remember that all the valuable tax benefits that pensions offer: tax relief at the highest rate, tax free cash, protection on bankruptcy, protection on insolvency, the individual controls the point of taxation and you've got tax free growth as well. So yes, there are questions about when money is coming out, whether pensions should now be first, or pensions should be last. But when you're looking at money in, it's no question, pension should always be first because they are the perfect vehicle to meet client's retirement income needs.

 (01:45): So today we're going to take you through the updated process that HMRC has put forward. In the response to the technical consultation that came out on the 21st of July, we're going highlight the areas where we believe there is still some complexity where HMRC does still need to provide further guidance and answers to some questions. We're looking at tax planning strategies to maximise the client's tax efficiency. And with these changes in mind now, that might be a continuation of pensions, as we're saying, you're looking at ISAs, you're looking at GIA, you're looking at an increased interest in use of trusts. You're looking at intergenerational planning through junior products. So we're going to kind of take you through that. And we're also going to highlight some kind of key areas as part of that when we're looking at the Autumn Budget.

 (02:38): Now we can only cover what we know so far. There is a series of workshops that has been taking place. I think there's been about five following the latest consultation. It's about five different workshops that have taken place. There is also a House of Lords inquiry currently underway to look at the implications of this new legislation and the finance bill that the House of Lords have asked for. And there's been a call for evidence on a number of different areas on how this is going to impact on personal representatives. So we also have HMRC newsletters that continue to come out. The last one was on the 25th of September, which was interesting because I was presenting that day in London on these kind of changes. And that was specifically on taking tax free cash out and then trying to put it back in, which is something that a lot of clients are currently looking at.

 (03:30): So, as I say, any newspaper, any online site, you will see headlines, lots of headlines because of the forthcoming changes to pensions. Pension withdrawals according to the FCA have gone up something like 36% in tax year 24/ 25, up to 70 billion. Now, part of that was because of the Labour Budget and the prospect that the Chancellor was going to remove tax free cash. But actually the pattern continued after that when there were no changes to tax free cash. But the IHT changes that had been announced then encouraged some people to say, 'right, I'm going to take some money out of pensions and do something well else with it'. And we have this continued speculation on the future of pension tax relief, possible changes to tax relief, removal of higher rate tax relief, changes to tax free cash.

 (04:24): Will it be reduced to a certain level? Restricted back from the £268,275 that it currently is for most clients, and also changes possibly to salary sacrifice. Now if this continues to happen, changes to pension tax relief is for every budget. We talk about the same thing. And will this be the Budget where the Chancellor does go ahead and make further changes? I would highlight quite a good report. I noticed recently from Lane Clark Peacock, which which was titled How to Avoid an Omnishambles Budget, which looked at these three changes: tax free cash, higher rate relief, and salary sacrifice, and kind of illustrated to the government - actually not to go ahead with that because of the complexity and the fact that there wouldn't be a massive surge and inflow because of those kind of changes. Another thing that we've kind of spotted in the press... Possible changes to IHT and , could you just take us through what's been suggested here?

 (05:21): That's right. There's been quite a lot of suggestion emerging from the treasury that there could be changes to inheritance tax. So we could see a review of the exemptions, we could see the IHT nil rate band being lowered. We could see the introduction of a new lifetime gift allowance. We could see a gift tax on lifetime gifts being introduced because there are similar gift taxes in other jurisdictions already. We could see an extension of the seven year gifting period. And although I've just covered possible IHT changes, we could also see an increase in capital gains tax rates, which could also make IHT planning more complicated, as well, or more difficult to achieve, I should say.

 (06:09): And so you could see that happening as, as a result of the IHT for pension changes, you could then say, 'okay, if people are going to change their behaviours', you could see that perhaps being countered by HMRC.

 (06:22): That's right. I think the more that people try to legitimately plan for IHT I think that HMRC maybe will view it that the extension of IHT to pensions hasn't quite achieved its aim. So it might look to close some of the planning opportunities that currently exist. Great, thank you. So what about IHT and pensions? It's quite an easy journey.

 (06:50): Absolutely. A continued upward struggle, I'd have to say, to get to where the government wants us to be. Now, they received something like 649 responses to that technical consultation. Just to put that in context. When the lifetime allowance was removed, put a technical consultation out at that point, and it attracted roundabout a 100 responses. So 649 to this one, there was nine workshops held. And what was clear is HMRC recognised that there was going to be a delay in benefits being paid out if the schemes were obliged to, to make these payments. And also the default position for most schemes, if they didn't have the information, was to just pay the charge, pay 40% of the benefits that were going to non-exempt beneficiaries to HMRC and let HMRC then resolve the issue and do repayments. Now, that's not something that the HMRC was keen to contemplate.

 (07:44): So as part of the review and the response, they've decided that actually the persons that have all the knowledge are the personal representatives. They know the complete picture. And that's what's happened that the onus is now being placed very firmly on the personal representative shoulders to report and pay the IHT. Now, that's much to the horror of the estate practitioners because that responsibility aligned fully with the personal reps is quite onerous. And actually also the legal firms have put representations back into HMRC to say, 'okay, can we change it slightly?' So they've come up with their own proposals, which government is also contemplating, but we have to get to a position where there is suitable compromise where schemes are able to meet the challenges. And personal reps are also able to meet the challenges. But we're not quite there yet.

 (08:43): So we have to remember what's happening here is we're removing the distinction between benefit settlement on death between different schemes. Some already operate with non-discretionary binding nominations. But what is happening here is the schemes that operate with discretion are just being brought into line with the non-discretionary process. So there is a kind of new process for payment of IHT. There's exchanges of information expected between the personal reps, between the pension scheme and also between the beneficiaries. And I'll take you through what that looks like in practice. So the IHT charge will be based on the gross funds at the date of death as opposed to the date of payment. And that's before any distribution and before any designation into drawdown, for example. But we still have the specter of the income tax position, also applying pre and post age 75.

 (09:34): That continues a possibility of a double charge, for example, on death before 75 benefits still being tested against the lump sum and death benefit allowance if they're paid as lump sum. So with marginal tax applying on any excess, and then any death benefits post 75 would be subject to tax anyway on the beneficiaries at their marginal rate. So you've got this prospect of double tax charges, 67% and upwards depending where you are in the country and what other income that you have. So that's something that really needs to be borne in mind.

 (10:11): Now, according to the government's own figures, 10,500 new estates who will be brought in that are not currently affected, but will be brought in. 38,500 estates paying more. Now, average IHT charge at the moment is £170,000 and the government anticipates that'll increase by £34,000 once these proposals are implemented and pensions are included in the estate for IHT. But they don't, well, they do recognise that those figures don't factor in behavioural changes. And that's something we're going to kind of look at today. If we will take action. IHT is a voluntary charge for most, apart from, obviously if you're less than minimum benefit age, there's very little you can do. But, but for those above that they can change the behaviours, they can take actions to minimise the IHT that's due on their behalf. Now, we can all debate whether or not this is a proper reflection of the numbers of people affected. What is undeniable is that all estates are going to have to do the calculations, collect all the information, decide whether or not an IHT 400 is required, if their IHT is due. So it is going to have a huge impact. So, but again, like the lifetime allowance changes, there are not that many people affected, but the ones who are affected are affected in a really big way.

 (11:35): So we'll look at the very latest, we'll look at that revised process and we'll look at the kind of planning opportunities that rise on the back of it. So the 21st July response paper confirmed that, yes, all death benefits from unused funds from drawdown funds and from annuity guarantees and from value protection will be included in the estate for IHT. Now, lump sums from death and service only schemes will not be included provided the individual is an active member. And in the employment, there's definitions of both. Now we've kind of pushed back on that to say, well, active member as defined means someone who's currently accruing benefits. Now you're not accruing benefits in a death and service scheme. So we're hoping that HMRC changes its definitions there, such that it would include people who are active members, but also people who are deferred members.

 (12:33): But we're still just getting life cover under that particular scheme. Charity lump sums are also included. Also dependent scheme pensions from DB schemes. There's a question about DC schemes that we're pushing back on and thankfully joint life annuities are not in scope as well. Because the rights of the reversionary beneficiary annuity are not part of the original member's estate. So they're not in scope for IHT as well. Now, the spouses civil partner and charity IHT exemption continues which is good. But as I say, personal reps responsible for reporting and paying IHT up until such times as when the beneficiaries are appointed, in which at that point, the beneficiaries become jointly liable once they are appointed. But what does appointment mean? Does that mean once the scheme has chosen them as a potential beneficiary or as a beneficiary?

 (13:29): Or is it when the scheme has chosen them but also awarded them a sum of money to then provide death benefits? So there's a question there that again, which has been pushed back to HMRC. Now if the individual has a IHT liability of more than £4,000, then they can say to the scheme, look, I want you to pay that tax charge for me. And the scheme would then be obliged to follow that direction and pay it within three weeks. Otherwise, the scheme would then become jointly liable for that charge. And it has been recognised that three weeks is a very short space of time for schemes to be able to get that request in and actually process it. So again, that might be extended out perhaps to like 30 days or something such like that. Now, if the charge is less than £4,000, the scheme can voluntarily agree to pay it.

 (14:20): And I can see that probably being the normal situation for schemes because there might be two or three beneficiaries. One has got an IHT charge more than £4,000, one perhaps £2000, and one £1000 for example. Now, would it make sense for the scheme to pay the £4,000 plus one, but not the other two? I don't see that being reasonable. I think the scheme would then just follow, if it's doing it for one beneficiary, it may do it for for the others as well. But that needs to play out. So there is this new process, new reporting requirements for schemes, which we're going to have a look at. But clearly HMRC have promised to issue lots more guidance information that can go to the personal representatives calculators that they can use to put in all the information on pension assets, non pension assets, such that the personal reps will be able to determine what the IHT position is. So lots more guidance, lots more material coming out from HMRC. And also the prospect is that IHT is meant to be digitalised. And now , what's the timescale for that?

 (15:28): And that's right. HMRC are saying that they're going to digitalise IHT by 2027. So, you know, in time for these changes being introduced. However, if we consider that making tax digital for income tax was first announced in the budget of 2015 and is actually going to be introduced for landlords and sole traders. And with effect from the 6th of April 2026, I guess it's anyone's guess whether they'll actually be able to achieve the 2027 deadline. Right? So 11 years. 11 years lead in period. That's right. So we anticipate that the personal reps may have to rely on their own guidance that they're receiving as opposed to being able to do this digitally. That's right. I think that would be the safest assumption.

 (16:22):

The safest assumption, absolutely. So let's have a look at the new kind of process. What does that new process involve? Well, I do like a flow chart. And you have to remember that HMRC's underlying principle is that tax should be simple. So I put this flow chart together to be able to illustrate that. There you go. I'm sure that's straightforward. Any questions on that? No, I'm being facetious there. It is a complicated picture. I'm not going to take you through that slide, but what I'm doing is breaking it down into individual steps and taking some of the issues that are unclear as we go along. So taking it at its very simplest level, you have to pay IHT within six months, well the personal reps have to pay it within six months of the end of the month of death. Now that said, that's at its very simplest, but you and I know that it's never quite that simple. So can you,  educate us here?

 (17:30): That's right  as you say, nothing is ever simple with tax. So as you rightly say IHT has to be paid within six months from the end of the month of death with interest starting to accrue from that date if the IHT is unpaid. And under the tax legislation, the payment of IHT normally follows the assets. So in other words, the personal representatives are responsible for paying the IHT in relation to the estate. The recipient of a gift would be responsible for meeting any IHT in relation to that gift. If the donor were to die within seven years, the trustees would generally meet the IHT. If a trust were created and the settlor died within seven years of creating that trust, or the trustees would meet the IHT liability, if the deceased had a qualifying interest and possession, if the estate comprises illiquid assets, so private company shares or commercial property or residential property, for example, then the personal representatives can choose to pay IHT over 10 years. But that will incur interest and it means that the estate can't be fully distributed for 10 years. So , if we turn now to look at pensions again. What's the next step of the process?

 (18:58): I was going to jump in just to say, that ability to be over 10 years, it may have thought that that could cope with if there's perhaps commercial property that's taking time to sell or if there's suspended funds, maybe that would help alleviate that. But just kind of thinking that through, there are issues there with benefits from uncrystallised funds not being properly designated or paid out as lump sum within a two year period. So perhaps government would have to look at changing the legislation there, if that was going to be a possible solution to some of the issues that have been highlighted there. Whether it's going to commercial property and such. A good point.

 (19:40): First thing that when the scheme is involved is that it will be notified that the individual has died. Now we'll need to get evidence of that, but also more importantly, we'll need to actually verify that person who is contacting us is the personal rep. And that's difficult in itself. So are we dealing with the right people who are the personal reps? Because from what you read in the press, there's a large percentage of people who die without a will. So what, what happens in that case, ?

 (20:16): So generally personal representatives will be brothers, sisters, mums, dads, children - family members will generally be appointed as personal representatives in the will. And if there's no will, then under the intestacy rules, it will fall to the closest living relative to step in and be the personal representative. But it's worth bearing in mind that personal representatives can become personally liable for actions and decisions made while they're administering the estate. So, for example, breaches of duty, unpaid debts and incorrect distributions. So I can really see it that if more personal representatives will probably want to appoint professionals to administer the estate on their behalf, or indeed people will want to appoint professionals in their will to act as executors to administer the estate. But obviously bearing in mind the fact that appointing professionals will come at a cost.

 (21:30): I mean, currently 75% of estates appoint professionals, but I could see that actually increasing once IHT is extended to pensions. So a much higher proportion of estates will appoint professionals to act either to administer the estate or to to be NPRs. And as far as the cost is concerned, that cost would usually be met from the estate. And currently under the legislation, there's no provision for that cost to be split between the estate and the pension. So if the beneficiaries of the estate are different from the beneficiaries of the pension, it could mean that the beneficiaries of the estate suffer detriment because they're meeting all of the professional costs from the estate. And there's no apportionment then in between the estate and the pension. And I think that also what will need to be considered is what happens if it's a small estate but a fairly significant pension and no one comes forward to act under the intestacy rules, for example where there's not a will in place or what happens if it's an intestate and there's no assets apart from the pension.

 (22:44): I think there's going to be a few problems here in establishing who actually is the PR and who has the authority to act. And also I think it will be hard for the pension scheme administrators to validate who the PR is because normally the pensions scheme administrator, so normally the life company or the platform provider would actually get the grant of probate in to establish who the personal representatives are. But obviously in this situation, we're going to have to release information before the personal representatives are actually appointed through the probate process. So I think there's going to be some further issues that will need to be ironed out and before the whole process is embedded.

 (23:30): Yeah, absolutely. And I think if there is no personal reps, there's no will for example, and they have to go and get personal reps appointed or executors appointed, that's going to take some time to do that, to achieve that. So when is the scheme notified and how do you get that verification, validation of the PR? These are all kind of really important issues when you're looking at who the PR is.

 (23:56): And I think as well, at a time when the family are at its most vulnerable, you're looking at beneficiaries that actually might have been relying on the income, for example, of the deceased person, they're worried about their own financial future. So I think this is going to be fraught with problems.

 (24:16): And then getting lots of information from the scheme and with this ultimate deadline over overhanging them. Yeah, it's going to be a bit of a fraught time for those individuals. I do see more professionals being appointed, but again, are there enough estate practitioners to be able to deal with all of these prospective estates looking and seeking this kind of help and assistance? And if not, then the cost then will likely increase. I think. What did you say the rough cost was?

 (24:47): I know that as far as my father's estate was concerned, and I mean it was fairly simple. It was about £5,000, just to give a rough estimate.

 (24:57): Okay, interesting. So once the scheme is actually validated, we're dealing with the right person, then the scheme must issue a valuation within four weeks. Again, there's been a request for that to be extended somewhat, but if as it stands it is four weeks now depending on how the scheme distributes its death benefits. The scheme might also seek additional information at that early stage. So for example, if the scheme operates with discretion, they would seek information on the possible beneficiaries at the same time as that valuation goes out. Then the next stage very much depends on, as I said, how the benefits are settled under that scheme. And maybe the scheme operates with binding nominations, in which case very quickly the scheme can say, 'there's a binding nomination that person's still in existence' and can confirm to the personal reps this is the split between exempt beneficiaries and other parties and that settlement can proceed.

 (25:59): It can note any possible IHT that's due. And at that point, because they're appointed, the benefits are awarded to these individuals because of that binding nomination, then they would be jointly liable from that point. You'll have other cases where the benefits are entitled, the estate is actually entitled to the death benefits. So that could be say buyout policies and also old retirement annuities where the benefits would be payable to the estate unless the policy's been written under trust, in which case it would go to the trustees of the trust. But again, benefits would be able to be settled, no delay there because the estate is entitled to those benefits or the trustees are. The delay is going to come where the scheme operates - and the vast majority of schemes, let's be honest, the vast majority of schemes - operates with discretionary disposal.

 (26:48): So there will be a delay whilst the scheme collects enough information to be able to exercise its discretion properly. Now the Ombudsman expects the scheme to collect all sorts of information about the person's circumstances. The background might seek information from the beneficiaries to say, do you wish to be considered? They might seek confirmation of age to be able to determine whether or not they meet the category of dependent or nominee. So there's a lot of information there. Now typically takes something like 270 days on average to settle death benefits under discretion because of this requirement to collect all the information necessary to be able to properly exercise your discretion and choose the right beneficiaries. Now some cases go through much quicker than that. Other cases are more complex, complex family circumstances, first and second marriages, et cetera. So some cases do naturally take longer to operate. So for those cases, the whole process then stops. Nothing can then proceed until the scheme decides, 'from the potential beneficiaries, who are we going to choose?'

 (27:58): Do you think that there will be more of a move towards binding nominations or do you think that actually we're more likely to stay with the current situation where most nominations are discretionary?

 (28:12): That's a good question. So yes, I would imagine that binding nominations from a scheme's perspective is much easier to achieve because it's very clear who the beneficiaries are and they're awarded the benefits and settlement can just proceed immediately. So it would be easier to meet that kind of six months overarching deadline. Because there are binding nominations, but binding nominations come with their own kind of issues. So such that we often see cases where a binding nomination's completed at the policy outset and is never reviewed again. The individual may have divorced, remarried, have further children for example, but because of it's a binding nomination and they haven't updated it, then the scheme would be obliged to continue to pay benefits to someone who's completely, wholly inappropriate if the client really understood what the situation was. So there are some known issues with binding nominations.

 (29:06): It's much better I would argue if the scheme operates with discretion such that it can collect all that information and say, 'okay, that nomination was done 10 years ago, what's happened in the intervening period.' And being able to make decisions based on what we feel is the most up-to-date and most reasonable solution at that point. And also even if we were minded from a scheme perspective to change to wholly binding nominations, then it would be difficult to encourage people to update if they've already done a discretionary nomination, how do you get them to kind of override it? You'd have to then give them an opportunity to do a binding nomination. And you know how difficult it is to get clients to do nominations in the first place because they just don't understand what the process is. They believe that if they nominate then the benefits automatically go to that person.

 (29:54): They don't understand what the discretionary process involves. So I think even if we did have binding nominations, we'd still have a category of individuals who haven't updated and can't be persuaded to update to a binding nomination. So you'd be running with two different types of nomination anyway, so it doesn't really properly resolve the situation. So once this scheme has actually eventually decided who the beneficiaries should be, then they need to tell the personal reps, give that information to them, what's the split between exempt and non-exempt? And that's to allow the personal reps to be able to calculate IHT that's due. Now I've had a lot of information. One question immediately is that is an IHT 400 required in all cases? There's a lot of questions on that, on that basis coming through. I've heard talk about an accepted estate, what's an accepted estate and even the simple things about the nil rate band, the transferrable nil rate band and the residence nil rate band. How does it all kind of play out in in practice?

 (31:00): Well, I'll try and shed some light on this now, at a very high level. So as far as inheritance tax reporting is concerned, inform IHT 400 and the supplementary pages have to be submitted within 12 months of death. But usually the IHT 400 and supplementary pages would be submitted within that six month timeframe in order for the grant of probate to be issued because the IHT needs to be paid before the grant of probate is issued. But it's just worth being in mind that there's a slight difference in the timeframe in that the IHT 400 has to be submitted within 12 months of death and before applying for probate. So it has to be completed as part of the probate confirmation process if there is IHT to pay or if the deceased estate isn't an accepted estate. So an accepted estate is generally where someone dies after the 31st of December 2021 and the value of the estate below the nil rate band or the estates with £650,000 or less and there's unused nil rate band that's being transferred from the first spouse's death or the deceased left everything to the spouse and the estate was worth less than £3 million.

 (32:18): So you can see that an accepted estate by and large is an estate where there's no IHT payable. I will say that there are some exceptions to the rule in that even though these estates might be within the nil rate band or might be covered by transferrable nil rate band, in addition to the nil rate band, there may be a requirement to submit an IHT 400, for example, if there've been gifts with reservation of benefit made during lifetime, if the estate's worth more than £3 million or if gifts have been made that are greater than £250,000 in the seven years before death, for example. So it's a case of looking at the individual circumstances of the estate to see whether one's required or not.

 (33:08): The next thing we have to consider is the allocation of the nil rate band on death. So the nil rate band and any transferrable nil rate band is offset, first of all against lifetime gifts in chronological order, starting with the oldest first. So for example, if there's a failed PET and because the donor has died within seven years, then that would obviously be offset, first of all against the nil rate band. And then as far as the remaining nil rate band and transferrable nil rate band is concerned, it would then be apportioned against the value of the assets of the estate, against the value of any pensions and against the value of any qualifying interest in possession trust. So whilst the LPR initially, go through the process of ascertaining what the assets are, they think they've found all the pensions, they go through this exercise of calculating what the IHT is by apportioning the nil rate band against the various pensions, the assets of the estate and pay the IHT.

 (34:14): But then say a year later, another pension comes out the woodwork, they discover that actually the deceased had another pension, then they're going to have to go back through that exercise of apportioning the nil rate band. Which could mean actually that there'll be more IHT payable from the estate, there'll be more IHT payable from the original pensions that they knew about. And obviously there'll be IHT payable in relation to this pension that they've just discovered. So it's going to be a bit of an iterative process and you can see that it's going to be quite hard to keep on track of additional payments that are going to have to be made, for example. And I think too that it's going to become more and more imperative that individuals keep good records because we know nowadays that a lot of assets are, and records relating to assets are digitised. So that will just make it harder for the legal personal representatives to ascertain what the assets of the state are unless there are some records kept about what accounts the individual actually owned when they died, for example.

 (35:26): And turning now to look at nil rate bands again, this will be a refresher for you. Obviously everyone has a basic nil rate band and it's currently £325,000 and it's fixed at that rate until April 2030. And as far as transferrable, nil rate band is concerned, the transferrable nil rate band is available to a surviving spouse who dies after the 9th of October 2007, that's when the legislation was introduced. It doesn't matter how long ago the first death was, it's just so long as the second death is after the 9th of October 2007. And the amount of the transferrable nil rate band that can be claimed depends on the unused percentage of the nil rate band on the first death. So if we look at an example where on the first death the nil rate band was £300,000 and £150,000 was left to children.

 (36:23): So that was a non-exempt transfer. It means that 50% of the nil rate band on the first day was used, 50% was unused. So when the second death occurs, so when the surviving spouse eventually dies, the surviving spouse's personal representatives will be able to claim 50% of the prevailing nil rate band in the year of the second spouse's death. So although the nil rate band was £300,000 in the year of the first death, if we assume that the second death occurred in this year, it would be 50% of £325,000 that could be claimed. And if we have a black widow situation it's worth bearing in mind that unused nil rate bands can be transferred on more than one death. If the surviving spouse has been predeceased by more than one spouse, but up to a maximum of a hundred percent. So actually in that situation if for example, 70% was unused on the first death and 30% was unused on the second death, then actually the surviving spouses LPRs can claim one additional nil rate band of 100%. It is possible to actually claim more than one nil rate band. So to claim two nil rate bands in addition to the basic nil rate band by doing some nil rate band world trust planning. But in all of this it'll be really important to keep good records from previous deaths to enable the personal representatives of the surviving spouse to make an accurate claim for any transferrable nil rate band. I like you're thinking there, black widow situation.

 (38:09): Yeah, very dark. That's right. And then looking at the residence nil rate band for the residence nil rate band to be claimed the individual has to die after the 5th of April 2017 and they have to have left an interest in a property that's been their main residence at some point to one or more direct descendants. So children, grandchildren, their spouses and adopted and stepchildren the residence nil rate band doesn't apply to lifetime transfers for the purposes of the lifetime tax. It only applies to the estate. It will apply to failed PETs and chargeable lifetime transfers to the extent they become chargeable transfers within the estate, but it just doesn't actually serve to mitigate against any lifetime tax that would be payable on a chargeable lifetime transfer. The residence nil rate band applies to those who downsize or stop owning property after the 7th of July 2015.

 (39:13): So if they, for example, were to sell their property because they were going into a care home but they still had some of the sale proceeds in their bank account when they passed away and the proceeds that they have left passed then to direct descendants then actually the residence nil rate band could be claimed in that situation. But the main impact of the extension of IHT to pensions is that where these states worth more than £2 million, the residence nil rate band is tapered away. So for every £2 in value over that £2 million threshold, so the residence nil rate band will be tapered away by £1. So it looks as though pensions will be included within the estate when measuring whether the estate is worth more than £2 million or not. So again, individuals with large estates actually should look to consider doing IHT planning during the lifetime to try and protect the residence nil rate band for example. And again, to the extent that the residence nil rate band is unused, it'll be transferrable to the surviving spouse, so can be claimed by the surviving spouse's legal personal representatives.

 (40:29): And that's irrespective , isn't it? Even if the pension's going to an exempt beneficiary, it still included the total value still included for the residence now band, is that right?

 (40:38): That's right. That 2 million threshold is before reliefs and exemptions. So that two, that 2 million is basically assets less liabilities.

 (40:50): So straightforward you said? Everytime you can go through that I think how complex it's going to be for the personal rep. So once I've gone through that process, they've fed it through the HMRC calculator and they've identified, for some cases no IHT is going to be due. So they need to inform the scheme that there's no IHT due and actually the scheme would then move to settle the benefits. That's not already happened without any reference to further IHT warnings. However, if there is IHT due, then again personal reps have to inform the scheme the amounts that are actually due from each beneficiary, what's the tax reference and details about the individual beneficiary. So the benefit settlement can proceed at that point. Now the scheme is then obliged to tell the individuals how, what the charge is and what their options are to pay it.

 (41:43): So I mentioned earlier, if the IHT due by that beneficiary is £4,000 or more, then they can say to the scheme, 'look, I want you to pay it.' And the scheme would then be obliged to pay it within a three week time period. If it's less than £4,000, and the scheme offers this ability to pay it, a scheme pays is what they're referring it to, which is going to potentially confuse it with annual allowance. But scheme pays can be on a mandatory basis, whether it's £4,000 or more, or on a voluntary basis if it's less than that. And as I said, if we were doing a mix of the beneficiary sum above £4,000, some with below, I would imagine most schemes would just agree to do that on a voluntary basis. But that needs to be confirmed. All the individual can choose to take benefits to pay or they can pay from their own resources.

 (42:36): Or it may be that the personal reps have already calculated, yes, there is IHT due and what they've done is used the free assets to pay that charge. And then now that might be that they then adjust the amounts going to the beneficiaries or they can reclaim the amounts from those beneficiaries if they're different. If they're the same, it's a bit simpler. But if they're different, then they can go to those beneficiaries and say, 'we've paid the IHT and we want that money back from you, or you're not getting a full inheritance because we've paid the IHT on your behalf.'

 (43:10): So the maximum that the scheme can be obliged to pay is based on the value of benefits that are awarded to that individual. So if the scheme is notified or directed by the beneficiary that they want to pay that, then it must be paid within three weeks. Now the scheme must either pay it or reject that application within that three week timescale. HMRC is coming up with its own form that will provide all of the information that the schemes would require in order to progress with that. And that's to minimise the amount of times that the cases are rejected as being incomplete. So those forms will come through, the individual will be able to tell the scheme here is the IHT charge. But, and certainly in in the workshops that have taken place to date, HMRC has also given examples where there is an IHT charge and also an amount due for interest, which would have to be set separately.

 (44:05): Here's the IHT charge, here's the interest payable, which kind of gives you an indication that even HMRC believes that many cases will go over that six months deadline from the end of month of death. So if paid by the scheme, the scheme then must then certify to the beneficiaries and to the personal representatives that that's happened, the amounts been paid, what date it was paid, and what the tax reference was. And then the scheme can then move to settle the death benefits as normal. So to the beneficiaries, we then offer what the benefit choices are. So death before age 75, any lump sum that's paid from, from those funds after IHT has been deducted, we'd be then tested by the personal reps against the lump sum and death benefit allowance in the same way that they do so now. Assuming that's from uncrystallised funds or from drawdown funds that crystallised on or after the 6th of April 2024.

 (44:58): And if the individual died post 75, then all benefits after the deduction of IHT may be subject to tax at beneficiaries' marginal rate. And if it happens that the beneficiaries have already received benefits and already paid income tax on those benefits, then they can do a reclaim, to reclaim any income tax which already paid on benefits that are subject to IHT. Avoid that kind of double taxation at that point. So that's the whole process start to finish. So away from the flow chart, you can see the challenges in here for the personal reps and for schemes to get that information to give to the personal reps, to feed it through the calculators to get it back and to meet this six months deadline. And as I said, HMRC is conscious of the fact that's going to be difficult and has kind of built into the examples that is supplied to date through the workshops, a separate amount being due for to cover interest payable.

 (45:58): So turning to planning opportunities, these are the kind of the groups, the seven groups that immediately jumped out us. So individuals who are over 75 with uncrystallised pension benefits, they're facing a double whammy. 67% plus if they die after age 75. So yes, they should be looking to perhaps take action sooner rather than later in order to minimise the risk of of that happening. But also cohabitees, you've got no transferrable rate, you've got single and widowed, childless, you've got no kind of residence nil rate band if you've got no direct descendants. So there's a number of categories of people are kind of disadvantaged with this. I'm not going to exclude them all. But also just taking a simple example of someone who had inherited the drawdown. So beneficiary drawdown was told client died before 75, you don't have to worry, these benefits will be tax free for your lifetime.

 (46:53): Actually that's not the case now enough that these cases have to be revisited because you've got the prospect of IHT then applying on their death as the funds then filtered down to the next set of beneficiaries. Also individuals with fragmented pensions. If you've got a number of different pension schemes, five or six different pension schemes, then you've got five or six different schemes that the personal reps are going to have to contact. In order to get all this information, they're going to be bound by the slowest one to react. So is there a call for consolidation as a result of that, to make the process easier for the personal reps then? Yes, probably now I think what people were doing were holding off. There was a suggestion that perhaps a flat rate death tax would be applied to schemes above a certain level and that's what encouraged certain individuals not to consolidate the pensions.

 (47:45): Because you could bring it into a tax environment whilst if they were fragmented they would be below that threshold. But that doesn't seem to have any mileage in it. Government very much keen on progressing with IHT proposals as has been put forward so far. So no real obstacle to consolidation and as I say, it's going to make things a bit easier, but looking specifically for pensions, there is sufficient time we would argue to get ahead and plan that. Undoubtedly individuals are going to require IHT advice on their total assets, what allowances are available to them and also the possibility of making gifts. Nominations are always important, making sure the nomination is in place, that it's regularly reviewed and it's updated. And then as circumstances change, then there's ongoing monitoring. Never has that been more important than it will be from 2027 onwards.

 (48:44): Now nominating a spouse or civil partner will avoid IHT certainly it will delay the issue to the second death. Now that might be a positive because the second death, the, the person who's receiving the benefits might be in good health will have sufficient time to plan ahead in order to gift the money away for example. Or it might be a negative where individual's health isn't great, there isn't sufficient time to plan ahead. So these nominations really need to be properly considered. Then naming any other party other than a specialist of a partner needs advice. But it could be for that particular client for the portion of the nil rate band that's relative to that client circumstances taking into account their other assets. And you could see nominations targeted at monetary amounts as opposed to percentages.

 (49:36): We talked about scheme issues, binding nominations would be easier to operate, but they do have limitations and removing that discretion is challenging. Transfers and contributions. Third party contributions, absolutely we're looking at that through gifting rules individuals making contributions for their children, for example, for grandchildren. Now obviously their gifting rules to contend with, but looking at junior products, junior SIPP, junior ISA for generational planning and gifting with a warm hand as opposed to on death. Contributions after age 75, we are one of the few companies actually continues to accept contributions after age 75, we have done so for years. They're not due tax relief, personal contributions, but those certainly will be less attractive when these proposals are implemented. On the plus side, there's no barriers now to transfer of value where individual is in ill health makes a transfer in the knowledge of ill health, or makes a large contribution then unexpectedly in ill health and then dies within a two year period.

 (50:33): Currently they can be included within the estate but that's going to be the position anyway. So there's no transfer of value there. But as I said right at the start, pension funding to meet individual's retirement needs and objectives are paramount still. Pensions are going to be the vehicle that provides that individual's retirement income needs, you need to take advantage of the kind of pension tax relief that's there whilst it remains there. Do have to maybe concede that you would review the pension last strategy or definitely if being used for estate planning. But my experience, the vast majority of individuals are providing for their own retirement income needs, but they do need to be able to do that. How much is enough for that person? It may be clear that they have sufficient and they have some wiggle room as well and there are excess funds that they do want to withdraw to either spend or to insure or to gift away.

 (51:26): We do see a renaissance in the bypass trusts settled death before April 2027 with no IHT and post April 2027 for perhaps a portion up to the nil rate band. Now use of bypass trust, it's coming out of a tax advantage pension, it's going into discretionary trust, that's subject to periodic charges, exit charges. So you're measuring the use of those trusts against IHT applying on the pension benefits in full. But they do need specialist tax advice, investment advice, and those trusts also would have to be registered with the trust registration service. But we do have to contend with it's going to be a massive amount of bureaucracy and required liaison between schemes, between the personal reps and between HMRC. Consolidation may help as we talked about earlier, but you're going to see a continued pressure on schemes to complete the discretionary process as quickly as possible in order to allow the personal reps to feed that information and to be able to identify is an IHT 400 required, is there an IHT charge, what is it? And actually to achieve all that within a very short space of time. So that's the main issues for for pensions. , what do you see on on your side?

 (52:41): So I think that first of all it'll be a case of trying to establish what the client's objectives are and ascertaining what their assets and liabilities are and considering what future access the need to income and capital and working out what their IHT exposure is now and what it's likely to be in the future. And looking at the tax position of each of their assets to establish what the position would be if they were to gift it now, if they were to make regular gifts or if they were to retain the assets until death, for example, to benefit from the CGT uplift on death. There are a number of advice issues on the non pension side. So for example revisiting the client's will, does it need updated? Are they still happy with the LPRs that they've got named on their will?

 (53:31): Consider will trusts, for example and leaving assets to charity, they might need to revisit that position. Currently it's the position whereby if they leave at least 10% of the net estate to charity, then they'll benefit from a reduced rate of IHT of 36%. Now, currently, it's not clear whether that 36% reduced rate will apply to the pension and it's not clear either whether the inclusion of pension within the estate - if the pension beneficiary is a charity, if that will also help them to benefit from the reduced rate of IHT. That's still an area that needs to be clarified. Clients could consider regular one-off gifts. So funding junior products for example, or making lump sum gifts into trust. Could consider using relief. So for example, business relief. But the downside of that is that obviously you'd have to consider the risk appetite of the client, the fact that legislation could change again in the future performance of the asset.

 (54:38): What happens if it's an unlisted company that then actually incorporate, you know gets listed on the stock exchange, you know, further down the line and no longer qualifies for business relief. And also when the changes come into play from the 6th of April 2026 if the client, for example, is invested in AIM shares, they'll only get 50% relief rather than a hundred percent relief. So there'd still potentially be IHT payable of 20%. For example client could consider using life assurance, but is the client insurable given their age should the client use whole of life or could they do some planning during their lifetime to mitigate the IHT making a term policy more attractive? Are you looking at single life or joint life second death cover?

 (55:33): How do you value a potentially reducing liability if they're going to be spending their pension over the lifetime? And it's important to consider that within protection, you have to be careful about avoiding wealth creation. That has to genuinely be a financial detriment to cover at outset and obviously gift intervivos could be useful to cover lump sum gifts. And finally obviously a client could spend their money to reduce their IHT exposure. So for example, if they're in habit of going to Nando's, they could actually look to maybe treat themselves and do some fine dining experiences instead.

 (56:14): Obviously there's a whole host of IHT exemptions to consider some applying during lifetime and some applying during lifetime or on death. The main one though, that I think that will come into play more as we see the extension of IHT into pensions is normally expenditure out of income exemption. And I'm already getting asked quite a lot of questions on this area. There are three conditions that have to be met. So the gift has to be made out of income after tax. So by income we mean pension income, rental income, salary, dividends, interest for example. And it's worth bearing in mind that HMRC deems it, that income becomes capital after two years. So if someone's accumulating interest, for example in the bank account, then HMRC deems it, that would become capital after two years.

 (57:19): The second condition is that the gifts have to be deemed to be normal expenditure for the donor, and HMRC generally looks at a period of three to four years. So a pattern being established over three to four years of gifts being made that are roughly about the same size and to the same class of recipients. Now, if the donor isn't sure who they want to benefit, then they could make regular gifts into a discretionary trust and that would meet that condition. And it is worth bearing in mind that if they're looking to make gifts out of dividends from their own private company, then dividends can fluctuate year on year. Then the fact though, that those dividends are fluctuating year on year, if a percentage of the dividends that are declared are being gifted, then that could still meet that criteria of being normal expenditure.

 (58:19): And then finally, after the gifts have been made it's worth bearing in mind that the donor standard of living should be maintained. So this is a reverse of the last example, if they're in the habit of going out and treating themselves to fine dining and all of a sudden they regularly visit Nando's (I mean, obviously there are other restaurants available, but I'm just using this as a contrast.) If for example, they were to go more regularly to Nando's where they've been in the habit of treating themselves to more expensive establishments in the past, then that could actually mean that this condition would be breached and that the exemption wouldn't actually apply. It's worth being in mind too that this exemption is applied for on death. So it's tested on death.

 (59:06): So really important that the donor keeps accurate records during their lifetime. And there is a form/template IHT 403. That's the supplementary page that the executor would use to actually declare any gifts that have been made before the deceased passed away. And there is a template on there which can help to detail out the individual's income in the year, their expenditure in the year, and showing that there is surplus income so that they can qualify for this exemption. And then just to finish off obviously I think we'll see a resurgence in lump sum gifts being made, and I think that we'll see a resurgence in investment bonds being placed in trust or being held in trust from outset. I think worth bearing in mind that if it's not clear who the beneficiaries of the trust are going to be, then why would you put your clients in a taxed environment? Maybe better to go offshore if it looks as though the beneficiaries might be non-tax payers at such time as benefits being passed out of the trust. But I do think we'll see a resurgence in lump sums being placed in trusts going forwards.

 (01:27): Thanks for that, . So we've looked at kind of the new IHT process. We've looked at some in the time that we had available. But I think key to all of this is making sure that there are adequate records. So nominations in place. All detailed records about gifting, 's talked about the 403 form, but having everything available such that the personal reps will be able to access all of this information, this information that's held digitally at the moment and the information that's held on paper, being able to actually access all that, contact all the relevant parties to get this information is going to be key to the whole thing. Now we have going to limited the presentation to just the main process here and some of the issues that are concerned.

 (01:01:16): We are going to do further sessions. We're going to look specifically at the use of bypass trusts because they're a real complex vehicle. Now if you've consolidated a number of pensions under one pension scheme, you've got various settlements running. So we're going to look at that in a bit more depth and some other areas and some other opportunities as well. So if you have other areas you would like to see us cover quicker, then please do let us know when you get the feedback. And we'll certainly put those to the top of the list. But in the meantime, I would just really like to thank you for your attention and your continued support.