Tax Liability Regarding Terminal Illness

NorthernGeezer_2

Just for the record..............I haven't got one but this subject came up during a recent discussion with some 'fellows' of a certain age   
I suppose there are 2 scenario's, before you die of a terminal illness diagnosis and after.
My personal situation...... I have a state pension which i understand ceases when I do, I have a cash ISA which I assume 'matures' and is paid out after you die, I also have 2 SIPP's which are both invested  in stocks, so, nothing complicated here...............I HOPE!!!!
Prudent financial management has allowed me NOT to pay any income tax in the 10 years I have been retired and I would like to minimise that burden after I've shuttled off this mortal coil.
Any advice would be gratefully appreciated

Albermarle

Your SIPPs ( like all DC pension pots) are not part of your estate, and should not be mentioned in your will ( assuming you have one) and are not included in inheritance tax calculations.
For each one you should have filled in an 'Expression of Wishes' form, naming who you want to be beneficiaries of the pension pot.
If you die before 75, then the beneficiary can withdraw money from the pension with no tax, but if you die after 75, they will pay normal income tax on withdrawals.
These rules could well be changed in the budget, as tax treatment on pensions on death is seen as being over generous.

Aretnap

ISAs meanwhile are treated as part of your estate like any other bank account. 

Not sure what difference you think being terminator ill would make - everyone is terminally ill before they die, some are just terminally ill for longer than others. Unless you mean that being diagnosed as terminally ill would encourage you to spend all your money on a round the world cruise or something. That way you wouldn't have to worry about what happens to it after you have gone - you can't take it with you after all.

Marcon

Aretnap said:

ISAs meanwhile are treated as part of your estate like any other bank account. 

Not quite:

Your ISA will end when either:

• your executor closes it
• the administration of your estate is completed

Otherwise, your ISA provider will close your ISA 3 years and 1 day after you die. There will be no Income Tax or Capital Gains Tax to pay up to that date, but ISA investments will form part of your estate for Inheritance Tax purposes.

If your spouse or civil partner dies you can inherit their ISA allowance. As well as your normal ISA allowance you can add a tax-free amount up to either:

• the value they held in their ISA when they died
• the value of their ISA when it’s closed

https://www.gov.uk/individual-savings-accounts/if-you-die

Aretnap said:

Not sure what difference you think being terminator ill would make - everyone is terminally ill before they die, some are just terminally ill for longer than others. Unless you mean that being diagnosed as terminally ill would encourage you to spend all your money on a round the world cruise or something. That way you wouldn't have to worry about what happens to it after you have gone - you can't take it with you after all.

If someone has medical evidence confirming they have a life expectancy of no more than 12 months, then:

• (scheme rules permitting) they can normally withdraw the whole of the capital value of a defined benefit pension which is not yet in payment, without impacting on any survivor benefits 
• uncrystallised DC funds can be withdrawn as a tax free lump sum (under the age of 75).

NorthernGeezer_2

After a recent health scare I'm just revisiting this post, one quick question………………

I have 2 SIPPS, each one contains a small amount of cash with larger amounts invested in multi asset funds. Whilst I accept income tax will be paid on any withdrawals during my lifetime, given these investments are via my SIPP, am I right in thinking no tax will be paid on these following my death??

DRS1

How old will you be when you die?

Who will inherit the SIPPs?

Will you die before or after the IHT changes come in and what will your estate be worth (including the SIPPs)?

NorthernGeezer_2

On the death front, I've not got a terminal illness, I'm 70 and recently had a heart attack, I'm OK but just covering the bases so to speak.

My wife will inherit the SIPPs, expression of wishes forms are in place.

I wont have to pay inheritance tax, the value of the house and taxable savings will fall below the threshold.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81950794#Comment_81950794

75 is the key age for income tax. If you die older than that then any withdrawals from the SIPP by your wife will be taxed at her marginal rate. If you die before whatever she withdraws is not taxable.

Unless they change the law.

When you die if you leave everything to your wife (and she survives you) then there is no IHT to pay. That assumes you are both UK domiciled.

When she dies she would have her NRB, what is left of your NRB and maybe two lots of RNRB (assumes she leaves the house to your children) which can get the nil rate band for IHT up to £1million. After 2027 that will have to cover not only the house and savings (whether taxable or not) but also the SIPPs.

NorthernGeezer_2

Thanks for the info guys, pretty much what I thought, fortunately I don't need to touch my SIPP nor investments, I've not paid income tax for 10 years now and don't want to start now, bit of a !!!!!! if I live past 75 though eh, lol.

DRS1

Couple of thoughts. Do you still have any tax free lump sum left in either SIPP? It is usually thought wise to extract that before you die (or before 75) as the tax free bit dies with you. You could take enough a year to fill an ISA perhaps.

You say you don't pay income tax. Do you use your personal allowance on any taxable income? Do you have any of that left? It may not be much if you have the full new State Pension but maybe there is a bit? If so you could draw enough taxable income from your SIPPs to use up any unused personal allowance. Of course with frozen personal allowance and increasing state pension the two are going to cross sometime so this may be something you could only do for a year or two.

NorthernGeezer_2

I don't have any tax free lump sum in my SIPP…………………..but my wife does, around £8k………. she has an ISA which she cashes in annually, banks the tax free interest and reinvests the capital in a 12 month fixed rate new one. So………….question……..can she put this £8k in a new ISA and top up from her capital, meaning she could pocket the £8k from her old ISA??

I don't pay income tax no and up to this year I was offsetting the unused part of my personal allowance against my private pension withdrawal, this year, I'll be paying tax on my state pension 😒