Inheritance tax question

m9g

Hi

My wife works part time and doesnt earn enough to pay tax.

Her father recently passed away and she inherited his private pension for just over 11k. She has been told that 40% tax will be deducted from it before it is transferred to her bank.

Is this correct for such a small amount?

Wouldnt a bereavement inheritance be the same as an inheritance so subject to the same rules i.e threshold being 325k

If the tax is paid could she then claim it back.

Its all a bit vague

Thanks for any help and advice you can give

M9G

p00hsticks

How old was her father when he died ? 
I believie the rules differ depending on whether he was over or under 75 

GrumpyDil

The following is my rough understanding of the tax treatment of pension benefits in this scenario, assuming that this is a defined contribution policy, but you will need to check this as it isn't an area I claim any expertise in. 

Pension benefits don't fall into an individual's estate so are not subject to IHT. The tax treatment does depend the age of her father when passed because if he was over 75 on death the income is taxable at the recipient's marginal rate but if he was under 75 it should be paid without tax being charged.

I think your wife needs to clarify the basis on which the payment is being made and taxed with the pension company. 

Assuming that the pension company are taking tax as income tax against your wife she will be able to get the money refunded to her. 

polar_pig

I agree with GrumpyDil. If your wife's father was over 75 when he died, the pension lump sum payment would be taxed at your wife's marginal rate. 

It is possible that as the pension provider has no official paperwork as to your wife's income or tax code they are obliged to tax it at an Emergency Rate of 40%. However you definitely need to check this with the provider. If this is the case, also ask if you can provide them directly with paperwork as proof to reduce their tax deduction. If the deduction is due to an Emergency Tax Rate, but the pension provider doesn't reduce the tax deduction, you should be able to claim back over paid tax from HMRC.

Keep_pedalling

This is not inheritance tax it is income tax. The pension company are not going to have a tax code for a one off payment so they have to deduct tax at 40%. As others have said she will be able to obtain a refund. Some income tax will be due as this payment will take her overall income over her personal allowance, but it will be at 20% and not on the whole amount. 

I am assuming your father in law was under 75 here.

Malthusian

Does she have the option of inheriting the £11k as a nominee drawdown pension instead of a lump sum? She could then take withdrawals as and when they were actually needed, potentially reducing the tax payable.

Keep_pedalling said:

I am assuming your father in law was under 75 here.

Over 75, otherwise it would normally be tax free.

Keep_pedalling

Malthusian said:

Does she have the option of inheriting the £11k as a nominee drawdown pension instead of a lump sum? She could then take withdrawals as and when they were actually needed, potentially reducing the tax payable.

Keep_pedalling said:

I am assuming your father in law was under 75 here.

Over 75, otherwise it would normally be tax free.

Whoops! Another senior moment 👨🏻‍🦳

m9g

Thankyou for all your comments, really appreciate it. Totally understand now.

Her father had just turned 76 when he passed, the original sum was 11,700 and payment was made to her bank today for 8,000 so assuming she has been taxed at the emergency tax rate as the pension provider didnt know her tax code.

Ive told her, based on what you guys have said to ring HMRC on monday.

Once again thankyou :-)