The group risk industry has warmly welcomed confirmation that death in service benefits will not be brought under the scope of inheritance tax (IHT) liabilities.
HM Revenue & Customs (HMRC) also confirmed NHS and other public sector schemes will be taken out of IHT scope from 6 April 2027 as the government attempts to provide consistency across the sector.
The decision has been greeted with a huge sigh of relief by the group risk industry which had feared a major upheaval and overhaul of schemes had the proposed rules prevailed.
Group Risk Development (Grid) spokesperson Katharine Moxham told Health & Protection the decision was “great news”.
“We are delighted that common sense has prevailed and death in service benefits will remain out of scope,” she said.
“We can move forward now and there will be no huge re-writing of policies.”
And Moxham (pictured) applauded the decision to standardise the approach across all death in service benefits by taking public service schemes out of scope.
“That really wasn’t the intention; death in service isn’t there for tax avoidance, they are there to support people in the worst time,” she continued.
“So it’s great news.”
Group risk insurer Canada Life also welcomed the decision.
“The government has also provided welcome clarity on the scope of the proposed reforms, confirming that death in service payments will not become liable for inheritance tax,” said its managing director for retirement Pete Maddern.
“These benefits provide a critical short-term financial lifeline for loved ones following the death of a working-age earner.
“Including them in the scope of the changes risked much wider repercussions not only for grieving families, but also for the employers that provide these benefits for their workforce.”
Last week Health & Protection revealed that Grid had written to chancellor Rachel Reeves to pursue a faster response on the details after several months without progress from HMRC.
‘Would create inconsistencies’
The decision came in a government response to a technical consultation on the expansion of IHT.
It stated that all lump sum death benefits would be in scope of Inheritance Tax, therefore death in service benefits provided as lump sums from registered pension schemes, would have been brought into scope from 6 April 2027.
However, HMRC noted that respondents queried this and highlighted that it “would create inconsistencies with death in service benefits paid in other ways, particularly payments of lump sums from a non-pension group life policy held in trust”.
It suggested that bringing all lump sum death benefits into scope would result in a behavioural response from industry, with employers restructuring their benefit packages to provide death in service benefits via non-pension trust structures instead.
However, this would not be possible for many public sector defined benefit pension schemes where payments are funded by the Exchequer, thus giving rise to a different inconsistency.
As a result, the government said it agreed with the points raised by respondents and from 6 April 2027 all death in service benefits payable from registered pension schemes will be out of scope of Inheritance Tax, regardless of whether the scheme is discretionary or non-discretionary.
“This means that there will be consistent treatment of death in service benefits between discretionary and non-discretionary schemes,” HMRC said.
“This is in line with the broader policy objective of removing inconsistencies in the Inheritance Tax treatment of different types of pension benefits.
“It will ensure that there is no behavioural incentive for employers to provide death in service benefits through alternative non-pension trust structures (which would have created a new inconsistency with public sector defined benefit schemes unable to take this course of action).”
It also meant death in service benefits paid by non-discretionary pension schemes which are currently in scope of Inheritance Tax, such as the NHS and other public sector schemes, would be brought out of scope from 6 April 2027.