The UK government’s decision to incorporate pensions into Inheritance Tax (IHT) calculations, effective from 2027, is anticipated to significantly complicate and prolong the probate process, causing delays of up to a year for grieving families. Probate, the legal procedure for managing a deceased person’s estate, already involves verifying beneficiaries, settling outstanding debts and taxes, and distributing assets. This process currently averages 9.3 weeks, but the impending IHT changes are projected to add months of bureaucratic hurdles, even for estates that don’t owe any IHT. The new rules necessitate contacting every pension provider associated with the deceased to confirm the value of unused pension funds, a process that will inevitably add considerable time, particularly for estates with multiple pension pots.
The inclusion of pensions in IHT calculations represents a major shift. Previously, an individual’s estate for IHT purposes comprised assets such as property, investments, and savings, while pensions remained exempt. The current IHT threshold stands at £325,000, or £500,000 if the primary residence is bequeathed to children or grandchildren. Any excess above these thresholds is taxed at 40%, with spousal transfers remaining exempt. However, from 2027, the value of pensions will be factored into the estate’s total value for IHT assessment, triggering the need for comprehensive pension valuations. This requirement will affect all estates, irrespective of their size or IHT liability, adding an additional layer of complexity and delay to an already emotionally challenging time for bereaved families.
The revised probate process will require executors to contact all pension schemes held by the deceased to ascertain the value of any remaining pension funds. Subsequently, they must utilize an HMRC calculator to determine any IHT liability and then re-engage with the pension providers if tax is due. Only after this intricate process is complete can the executor apply for probate, which itself can take several months. This delay can create significant financial strain on families who rely on these funds to cover immediate expenses like funeral costs or outstanding bills. Furthermore, pension providers are prohibited from releasing any funds to beneficiaries until the IHT assessment is finalized, further exacerbating potential financial hardships.
The impact of these changes is expected to be widespread. Experts predict a surge in probate delays, potentially exceeding a year in some cases, placing bereaved families under considerable financial pressure. The added administrative burden will affect even those estates that ultimately owe no IHT. The process of locating and contacting multiple pension providers, awaiting valuations, calculating potential tax liabilities, and then awaiting probate approval can significantly prolong the settlement of the estate, impacting families’ ability to access much-needed funds. This added complexity further underscores the importance of meticulous estate planning and clear communication with beneficiaries.
To navigate this complex process, individuals applying for probate must first gather the necessary documentation, including the original will and any relevant financial records. They then need to apply to HM Courts & Tribunals Service, either online or by mail, incurring a fee of £300 unless the estate’s value is below £5,000. Executors named in the will are responsible for applying, while the closest living relative assumes this role in the absence of a will. While there’s no official mechanism to expedite probate, thorough preparation and accuracy in the application can minimize potential delays. Seeking professional guidance from a probate lawyer, although incurring additional costs, can help ensure a smoother process, especially for complex estates.
Despite the impending changes and potential delays, there are steps individuals can take to prepare and potentially mitigate some of the difficulties. Maintaining organized financial records, including details of all pension schemes, can simplify the process for executors. Regularly reviewing and updating wills to ensure they reflect current circumstances and wishes is also crucial. Open communication with family members about financial matters can alleviate stress and confusion during the probate process. While the upcoming changes to IHT and probate present new challenges, proactive planning and seeking professional advice can help individuals navigate these complexities and ensure a smoother transition for their loved ones.
