Tax due on uncrystallised SIPP after death? Probate?

GoGas

Where somebody has died and the value of the non accessed / crystallised pension (SIPP) is slightly over the Life Time Earning Allowance (due to growth) then tax will be due on excess above the LTA. All assets (including the SIPP as cash) are passing to spouse (acting as executor) and hence no IHT is due.

Can anybody advise when this pension tax is paid and if it is part of the probate process? IHT form 400 is completed as part of probate process but when would the SIPP pension payment be made? Would this be later as part of the final tax return for the deceased and not as part of probate process?

thanks

jamesd

The pension provider will tell HMRC and the recipients of the money how much is above the lifetime allowance. HMRC will send a tax bill to all recipients telling them how much tax is due. The portion below the lifetime allowance limit is tax free to any recipient, spouse or not, including having no potential future inheritance tax liability.

The tax is not part of probate because the pension payment is not part of the estate and probate only covers things that are part of the estate. The executor has no direct control of what happens to this money because it is not part of their authority to decide what happens to it, nor does the will govern because it is not part of the estate.

An expression of wishes form may have been provided to the pension trustees, if so, the trustees will be expected to use that as guidance in making their decision. The pension trustees should be notified of all potentially interested possible recipients so that they can make their decision about who should receive the money and how much. This would normally include all children at a minimum.

I'm assuming by the mention of the word "executor" that there is a will. If the death was intestate much more may need to be written about what should happen to the estate, notably if there are any children.

The pension is not part of the estate so no Inheritance Tax could be due on it whatever the Lifetime Allowance situation is. However, if the person inheriting the money may die in a few years, it will create a future large inheritance tax bill when they die. For this reason it may be useful to ask the pension trustees not to pay all of the money to them but instead to pay some or all of it to the people who they would want to receive the money after their own death. This exploits the way the pension payment is free of all taxes at present. There is a risk that the current recipient might need the money, of course, so some care should be used in deciding how much might be transferred in this way. The pension trustees are free to accept requests to do things like this if they wish to, it is a matter for their discretion and that discretion capability is why there is no inheritance tax liability on these payments.

GoGas

Great answer. Many thanks

If the spouse receiving money leaves the money also as uncrystallised SIPP with the Pension Provider presumable however it would then count as part of their OWN LTA (£1.25m) and would be taxable on their death where as the deceased had LTA of £1.8m. So better small tax bill now than large in the future?

kidmugsy

GoGas wrote: »

If the spouse receiving money leaves the money also as uncrystallised SIPP with the Pension Provider presumable however it would then count as part of their OWN LTA (£1.25m)

I have a newspaper cutting in which a pension expert at Standard Life says that an inherited pension will not count against the inheritor's LTA, under the law that applies from next tax year. Apparently one can contrive to put off receiving the money until then if the death is recent.

Whether passing on pensions free of IHT will still be law at the time of the second death is unknowable.

jamesd

Yes, the spouse could leave it in a pension pot in their own name. However, if there are potential people to inherit it and the spouse has some interest in enjoying seeing them benefiting from the money, why not ask the pension trustees to pass some of it directly to those people?

Right about the LTA drop. That's one reason to have at least £550,000 paid out, exploiting the higher LTA of the deceased.

It's also of note that I just assumed that death happened before age 75. Please say if the deceased was 75 years old or older so we can be sure to give correct suggestions for that situation. The main difference is the 55% tax charge that is payable after age 75 - not tax free up to the LTA!

It's also necessary to read about the changes coming from 6 April 2015, and part 2. I'm not sure if it's possible to delay, it might be based on the date of death, not the date of payment. kidmugsy do you happen to have any reference for the putting off aspect? The huge change is the money being taxed at the income tax rate of the recipient when death was over 75, instead of taxed at 55%.

kidmugsy

jamesd wrote: »

kidmugsy do you happen to have any reference for the putting off aspect? The huge change is the money being taxed at the income tax rate of the recipient when death was over 75, instead of taxed at 55%.

"Where the death of the member or beneficiary occurred before age 75 any payments of income withdrawal to the beneficiary or successor can be made tax-free providing the funds are designated within a two-year period. A new BCE will be introduced, to test any uncrystallised funds on the death of the member that are designated within the two-year period to a dependant’s or nominee’s flexi-access drawdown fund where the member dies under age 75. Any excess in consequence of this BCE will be subject to the lifetime allowance charge. Where the designation is not made within two years, or the member has reached age 75 at the time of their death, all payments of drawdown pension will be subject to the recipient’s marginal rate, but will not be tested against the lifetime allowance."

So you ask the pension provider to put off transferring the funds until the new tax year; as long as you don't delay outside the two year period, all should be well.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/385065/TIIN_8130_2140.pdf

According to AXA, 'BCE' = Benefit Crystallisation Event

GoGas

Thanks for complete answers and ideas. In the situation described the beneficiary (all under 75) already has good final salary scheme + own SIPP (uncrstallised) + survivors 50% of spouse generous final salary pension. Hence another pension will not be required (regardless LTA rules)and will be better to SIPP as cash and can then be invested tax efficiently as e.g onshore bond as pension income from x2 final salary scheme is already more than required.

ESTONIA12

helping a friend complete a IHT400 ( father recently died) and only for the reason that the parents home was transferred to the 2 sons in 2004 and for that reason the IHT400 has to be completed........there is no IHT TO PAY.......boy what a form to complete!.

ESTONIA12

dealing with a friends estate of her late father.............as it is there is no IHT to pay but the inland revenue have stated that I must fill in the IHT400 form as the home which was originally owned by the parents was transferred to the 2 sons in 2003 and classed as a GIFT of Reservation of benefit

as the fathers spouse is still alive do I really need to complete this very complicated form?

thank you

xylophone

https://www.clarkewillmott.com/blog/read/the-family-home-what-can-you-do-to-save-iht/445

https://www.gov.uk/inheritance-tax/passing-on-home

If HMRC require the form to be completed then it should be completed.

After they had made the gift, did the parents continue to live in the home rent free or not paying a commercial rent to the sons?