Inheritance Tax on pensions - budget announcement and consultation

leosayer

Thought I'd create a thread to discuss this particular announcement.

During today's Budget, Chancellor Rachel Reeves said: "First, the previous government froze inheritance tax thresholds until 2028. I will extend that freeze for a further two years until 2030 that means the first £325,000 of any estate can be inherited tax free, rising to £500,000 pounds if the estate includes a residence passed to direct descendants and £1 million when a tax free allowance is passed to a surviving spouse or civil partner.

Second, we will close the loophole created by the previous government made even bigger when the lifetime allowance was abolished by bringing inherited pensions into inheritance tax from April 2027."

Consultation link here: 

https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment

Bolt1234

Its whether you will be allowed to leave your pension to your spouse ONLY as assets left to spouses SHOULD be free of inheirtance tax.  Its either part of the deased person's estate or isnt.  Otherwise where will it end.  You can leave your house to your wife but its subject to tax, or savings, or ISA's.

As someone else said the devil will be in the detail.  

I am really hoping that they will allow it to be inheirted by your spouse but I dont trust Labour.  They dont like people with money.  The farmland limits are a disgrace.  What farm an you get for £1m?

Tax_Slave

leosayer said:

Thought I'd create a thread to discuss this particular announcement.

During today's Budget, Chancellor Rachel Reeves said: "First, the previous government froze inheritance tax thresholds until 2028. I will extend that freeze for a further two years until 2030 that means the first £325,000 of any estate can be inherited tax free, rising to £500,000 pounds if the estate includes a residence passed to direct descendants and £1 million when a tax free allowance is passed to a surviving spouse or civil partner.

Second, we will close the loophole created by the previous government made even bigger when the lifetime allowance was abolished by bringing inherited pensions into inheritance tax from April 2027."

Consultation link here: 

https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment

Thanks for creating this thread and pointer to document.
In my case I will die prior to 75 due to health issues (unless a miracle cure becomes available in next couple of years).
My share of house will pass to my wife with IHT at nil band.
Any money I have in savings will pass to my wife IHT at nil band.
And from I read below;
My £250,000 pension fund (DC) will now pass to my wife at IHT nil band.

If I do live beyond 75 (unused pension pot) will pass to wife IHT nil band.

”

Case Study 4 

This case study sets out how changes will impact deceased members when benefits are passed to spouses or civil partners. 

4.1. Andrew dies aged 70. At the date of his death, the value remaining in his DCpension fund is £400,000. The remainder of his estate is valued at £1,200,000 which passes to his civil partner. Although Andrew expressed his wish for any value remaining in his pension to be passed to his civil partner, this is at the discretion of the pension scheme trustees. Generally, transfers between spouses or civil partners are wholly exempt from Inheritance Tax.  

Current position 

4.2. For Inheritance Tax purposes, Andrew’s estate is valued at £1,200,000. The DCpension fund does not form part of Andrew’s estate for Inheritance Tax purposes because he does not have a power to dispose of it as he wishes. As the remainder of Andrew’s estate passes to his civil partner, the transfer is exempt from Inheritance Tax, meaning no Inheritance Tax is due. 

Position from 6 April 2027 

4.3. The value of Andrew’s DC pension fund will be included within his estate immediately before his death for Inheritance Tax. Andrew’s estate, for Inheritance Tax purposes, will be valued at £1,600,000. Assuming the value remaining in Andrew’s pension fund as well as the remainder of his estate passes to his civil partner, the transfer of both the estate and the pension fund will be exempt from Inheritance Tax, meaning no Inheritance Tax is due.  

4.4. If the value remaining in Andrew’s pension fund is paid to someone other than his civil partner, the nil-rate band may be available to reduce the Inheritance Tax due on the pension death benefit, with Inheritance Tax being due on the amount above the nil rate band. ”

CaptainWales

This proposal, like many IHT provisions, automatically assumes the deceased leaves everything to their partner who they are married too. Lots of modern families nowadays don't fit that mould and will be penalised. Take the person who has divorced and living with another partner (unmarried). Or the single person who has no spouse to leave it too. Disgraceful assumption to make in these times.

Marcon

Bolt1234 said:

Its whether you will be allowed to leave your pension to your spouse ONLY as assets left to spouses SHOULD be free of inheirtance tax.  It's either part of the deased person's estate or isnt.  Otherwise where will it end.  You can leave your house to your wife but its subject to tax, or savings, or ISA's.

Currently it can be paid to the estate and if payment is at the discretion of the trustees of the scheme, it isn't taken into account for IHT purposes. 

Bolt1234 said:

Its whether you will be allowed to leave your pension to your spouse ONLY as assets left to spouses SHOULD be free of inheirtance tax.  Its either part of the deased person's estate or isnt.  Otherwise where will it end.  You can leave your house to your wife but its subject to tax, or savings, or ISA's.

As someone else said the devil will be in the detail.  

I am really hoping that they will allow it to be inheirted by your spouse but I dont trust Labour.  They dont like people with money.  The farmland limits are a disgrace.  What farm an you get for £1m?

Not subject to IHT if left to spouse or civil partner. ISAs have special treatment to accomplish this: https://www.gov.uk/individual-savings-accounts/inheriting-an-isa-from-your-spouse-civil-partner#:~:text=If%20your%20spouse%20or%20civil,their%20ISA%20when%20it's%20closed

Moonwolf

May I ask a question?  When the new pension freedoms were announced, were any changes to tax rules made?

Before then, presumably pensions could be inherited from someone who hadn't taken an annuity but once an annuity had been bought, there would have been nothing to pass on. 

So could a pension have been used as an tax avoidance vehicle before then?  Presumably, only intentionally if you had enough other assets to defer taking an annuity?

So for how long have pensions been the way many think of them now, something to draw down then pass on?

dunstonh

May I ask a question?  When the new pension freedoms were announced, were any changes to tax rules made?

The tax rules were largely the same as they were in 1988 when personal pensions were brought in.  Prior to 1988, the fund was not inherited.  Death benefits on pensions back then was three times the annual annuity or return of contributions.

You had to buy an annuity by age 75 under prior to pension freedoms (ignoring the niche get outs that existed).    With the pension freedoms, the old age 75 rule was retained in respect of death but what was new  was death after age 75 as that was not possible previously. 

Tax_Slave

This seems an improvement over old system if leaving pension pot to spouse/civ partner.

Prior it was tax free if left to spouse if you died prior to age of 75.
If you died at say 76 then spouse paid tax on income from pension pot(?).

Now it’s part of estate and whatever age you die, spouse inherits it tax free?

Bolt1234

Marcon - are you saying that if my dear husband leaves his large pension pot to me via an Expression of Wishes (which is what is in place at present) as I am his wife I can get it free of any tax?  We both have wills.

He has already taken his 25% tax free element.

Is the only 'loophole' that they are changing is that you cannot leave a pension pot to anyone free of tax if you die before the age of 75? 

This is really important to me hence the many questions.  Has effectively the under 75 before you die rule being scrapped?

dunstonh

The LTA was introduced with pension freedoms.  

LTA was introduced a decade earlier in 2006.

One concern I have is that pensions generally pay out within 1-3 weeks of death if there is an expression of wish.   If the pension is brought into the estate then probate will delay that.

Another potential issue is that the costs of running the pension wrapper will increase significantly.    Pension providers will need to use their own funds to pay the inheritance tax and be reimbursed.  Delays paying the tax will trigger penalty interest.    So, expect pension charges to be increased

Marcon

Bolt1234 said:

Marcon - are you saying that if my dear husband leaves his large pension pot to me via an Expression of Wishes (which is what is in place at present) as I am his wife I can get it free of any tax?  We both have wills.

He has already taken his 25% tax free element.

Is the only 'loophole' that they are changing is that you cannot leave a pension pot to anyone free of tax if you die before the age of 75? 

This is really important to me hence the many questions.  Has effectively the under 75 before you die rule being scrapped?

It'll be important to a lot of people, which is why it is particularly important not to confuse intention with action - there's a long way to go and if you look at the consultation (see link in first post) you'll see just how much. Until the fine detail is available, it would be daft for anyone to speculate on what really will happen.

There's also the little matter of your dear husband having to die before he can leave you his pension. Under current legislation, it would be free of income tax/not subject to IHT if the trustees make the final decision, guided by his EOW, and he is under 75 when he dies.

Without wishing to be morbid (apologies), have you considered the reverse situation, where he outlives you?