Income Tax on interest payments against Tax Free Lump Sum

jewellery10

My husband died 4 years ago, and due to a dispute with the Pension Provider, the tax free lump sum payment due as part of his private pension was not paid until recently.

The pension provider paid accrued interest against the tax free lump sum from Date of Death until date payment made, less Income Tax deducted on the interest.

Is the interest liable to Income Tax? Who's Income tax is it? My late husband's estate, or mine as the prime beneficiary of the estate?

le_loup

Who was/is entitled to the lump sum? Was it to be put into the estate or payable straight to you. Are you going to distribute part of the lump sum to the other estate beneficiaries?

jewellery10

My husband died intestate. The lump sum was paid to me, but I am not sure if the personal pension my late husband had one of those "Expression of Wishes" clauses. How do I find out? The pension provider company have shown that they are administratively incompetent.

I am just trying to ascertain if I should be liable to pay income tax against the interest, or should my late husband's estate (and therefore his tax allowance could be used)? As the lump sum was tax free, and the pension provider caused the delay in paying the lump sum, what are the legalities of the tax position?

uknick

OP,

If, and I say if, the pension benefits in death are assigned at the discretion of the pension trustees to a third party, i.e. you, then the lump sum does not form part of the estate.

Therefore, I believe, the interest tax is a liability of the beneficiary. This is how it worked with my late brother's pension last year. It was paid to my mother, his nominated beneficiary.

It took a couple of months to finalise the payment and there was a small sum of interest after tax added.

Could we have claimed the tax back? Despite it going to my mother whose income is well below the personal tax allowance the sum was so small we didn't bother.

antrobus

jewellery10 wrote: »

....Is the interest liable to Income Tax?

Yes.

jewellery10 wrote: »

.... Who's Income tax is it? My late husband's estate, or mine as the prime beneficiary of the estate?

Yours.

I don't think it matters from an IT perspective whether or not the interest is either (a) the income of your late husband's estate, of which you were the beneficiary, or (b) yours. As far as I'm aware, the estates of deceased person (like all trusts) aren't entitled to a personal allowance and are simply liable for basic rate tax on interest income. When the estate distributes said income to the beneficiaries, then it becomes taxable in the beneficiaries hands.

Personal representatives are responsible for making a return of any income, profits or gains arising to an estate and for paying any income tax or capital gains tax that is due. They must deduct tax from all estate income at the basic rate (or equivalent investment rate on interest and the dividend rate for dividend income) before distributing the income to beneficiaries....They should use form R185 (Estate Income) to notify the beneficiary of their income from the deceased's estate for the year and the tax paid on that income......

But the tax arising on the income from the estate of a deceased person is also accounted for in the hands of the beneficiaries. The beneficiaries who have an interest in the estate should enter the income attributed to their share of that interest on their personal self assessment tax return, but, because to those beneficiaries of UK estates this income is taxed income, the associated tax credit should also be entered in their personal self assessment tax return.

http://www.hmrc.gov.uk/manuals/salfmanual/salf806.htm