Taxing an annuity (inherited)

findingtaxtaxing

Hi, It's my first time posting - I'm stuck and I'm hoping someone with more experience can help. I've inherited an annuity which will be paid monthly into my account for another couple of years. This annuity was included as a lump sum in the inheritance tax calculation and I paid 40% inheritance tax on it. I'm now being told that I also have to pay normal 20% PAYE tax on it too. That means 60% tax...that can't be right - can it? The solicitor said it is but I've lost confidence in them, mostly because it doesn't sound logical. Given the per hour charges I'm faced with I don't want to push back unless I can find out more. Does 60% tax on an inherited annuity sound right to you? Thanks :-)

ermine

findingtaxtaxing wrote: »

That means 60% tax...that can't be right - can it?

It can. An Annuity is an income, and therefore income tax is payable on it at your marginal tax rate.

Mark_Jefferson

The Government actually does a fairly good job of explaining this:

https://www.gov.uk/tax-on-pension-death-benefits

I'm not an expert, but although not unheard of it's unusual to IHT to pay on an annuity. This is typically because payment to beneficiaries is regarded as 'discretionary'. It would be interesting to ask your solicitor why it wasn't regarded as discretionary in this instance.

Unfortunately, there may be PAYE tax to pay depending on when the individual died. If they died after 75, you'll have to pay income tax on the annuity unfortunately. If the original annuitant died pre-75, it's usually income tax free.

dunstonh

This annuity was included as a lump sum in the inheritance tax calculation and I paid 40% inheritance tax on it.

What type of annuity is it?

You have posted in the pensions section, which would suggest a pension annuity, but those are not included in the estate and no IHT is chargeable. So, this would suggest it is a different type of annuity.