Clients inheriting pensions after April 2027 could face months-long waits to reclaim overpaid inheritance tax (IHT) because of delays at HMRC, advisers have warned.
Pensions are set to be brought into the scope of IHT from April next year, but for families inheriting pensions from anyone who dies after age 75, they could face the same money being bit with IHT and income tax and having to reclaim overpayments.
Eleven.2 Financial Planning founder Greg Moss said that while in principle new rules are designed to prevent double taxation, the reality "could be messy" and result in families waiting months to claim back overpaid tax.
"One of the big concerns with bringing pensions into the IHT net is the risk of double taxation, where both IHT and income tax is paid on the same money," he said. "The reality could be messy depending on how it's handled."
NCL Wealth Partners founder Graham Nicoll added: "While the proposals are designed to prevent double taxation in theory, in practice many clients are likely to experience it that way.
"Where pensions fall into the IHT net and beneficiaries also pay income tax on withdrawals (particularly post-75 deaths), the combined effective tax rate can be very high as in essence the same pound is being taxed twice."
He said the bigger concern is operational, as introducing pensions into the IHT framework creates a complex, multi-party process involving personal representatives, pension schemes and HMRC.
"Timing mismatches, especially around valuations and payment deadlines, make overpayments and subsequent reclaims quite possible, but likely time consuming," he said.
"As a result, delays, administrative friction and increased interaction with HMRC are likely, particularly in the early years.
"Unless guidance and systems are exceptionally clear and well-coordinated, there is a real risk this will be challenging to administer in practice. I expect there will be painful teething challenges in the early days."
Moss said the best way to avoid issues is for beneficiaries to ask the pension scheme to pay the IHT due on the pension directly to HMRC.
"If they take the pension first and settle the IHT themselves, the payment is likely to be taxed initially, with any excess needing to be reclaimed from HMRC. That creates a risk of delays, complexity, and beneficiaries being temporarily out of pocket," he added.
It is understood HMRC will introduce a dedicated system to reclaim overpayments.
A spokesperson for HMRC said: "We continue to incentivise pensions savings for their intended purpose of funding retirement instead of being used as a vehicle to transfer wealth – more than 90% of estates each year will continue to pay no inheritance tax after these and other changes."
Read more: Professional Adviser's IHT hub
