Philip Nairn examines the risks that will come along with the upcoming pension changes
From a practical perspective, there is still a significant amount of uncertainty about how the inheritance tax (IHT) changes for unused pensions and death benefits will actually work from April 2027.
Private client teams have functioned diligently within an established legal framework for many years. Processes have become honed and firms know where the risks are. However, this familiarity is all about to change.
Risky business
Removing the long-standing IHT exemption will inevitably create more rules, more administration and therefore more risk for firms. It potentially means a substantial increase in taxable estates.
The number of estates that attract inheritance tax is likely to rise significantly. For many executors, obtaining a relatively straightforward grant of probate will be less common, because more estates will require IHT calculations before a probate application can be made. As a result, legal firms will need to create capacity for more work, while managing greater levels of risk.
Most private client solicitors run incredibly client-centric businesses. They care about the families left behind, and sensitively support and guide people through some of the toughest times of their lives. That’s why many chose this area of law in the first place.
However, the reality is that more time will be spent completing complicated tax forms.
Risk will also increase. Inheritance tax forms are already convoluted. It only takes just one missed digit, or a figure not updated after new assets come to light, for inaccuracies to creep in. At the very least, one small error could lead to HMRC queries resulting in delays and dissatisfied beneficiaries. In the worst case, a firm could be liable for professional negligence. Yet, these are just sort of mistakes that can easily happen as pressure and workloads grow.
Commercial reality
Firms will need to question how these risks will be mitigated. Will prices need to increase for example?
For teams acting for high-net-worth clients on hourly rates, perhaps this isn’t such a difficult conversation. However, for the majority of private client firms working on fixed fees, someone will have to pay. Either firms will have to increase their prices or absorb the additional work themselves. Neither option is particularly attractive.
Where data enters
One area where firms can reduce both risk and cost is with data entry.
Manual data entry offers one of the biggest risks for human error. IHT forms require the same information to be entered repeatedly and figures carried across multiple sections. If new asset information arrives late on in the process, everything has to be updated consistently. Even the most diligent data entry clerk can miss something.
However, data replication and automation is one of technology’s strengths and in recent years, tech has really moved on with sector specific, user-friendly real-world applications which offer real benefit to legal teams.
Understandably, there has been scepticism around legal technology, but today’s best tech tools aren’t trying to replace legal expertise. They’re designed for ease of use and to remove repetitive administration. Automated calculations can easily ensure information is replicated consistently across forms, reducing the chance of human error at the same time as giving solicitors more time to focus on their clients.
The April deadline looms
We can’t forget that April is already one of the busiest times of the year for many private client teams, so timing may bring a further issue. Clients often want estates concluded to tie into other year-end financial affairs, when workloads are already stretched. Add what could be a significant increase in taxable estates to the need for new forms and unfamiliar processes, and firms have some serious planning to do.
Technology can undoubtedly help. Better processes will help too. However, until we know more about how these important changes will work in practice, the only certainty in relation to IHT for pensions, is uncertainty.
