Inheritance Tax on pensions - budget announcement and consultation

SnowMan

zagfles said:

SnowMan said:

[Deleted User] said:

Let's look at the numbers.  Say you got basic rate tax relief on the money going into the pensions but you have more than £325,000 of assets (including what's left of your pension).  A nice situation to be in.  That top bit of your pension that causes you to go over the £325,000 threshold will be taxed at 40% and what's left taxed at 20% (if your kids are basic rate taxpayers).  That's a 52% marginal tax rate (but could be more).  So now we are at the stage of asking whether it is worth getting 20% tax relief to (i) pay 15% tax if you take the money out, or (ii) your family paying at 52% when you die old.

In the old fashioned times that wasn't an issue.  

You get tax relief on the pension as it goes in and usually if you take it out you incur a slightly lower rate of tax (allowing for tax free cash amongst other things). If you then die you pay inheritance tax on it. But the tax saving (= tax relief rate in less tax rate out) mitigates the estate inheritance tax bill.

Alternatively you get tax relief as it goes into the pension. You leave it in the pension, you die, and your dependants take it out incurring a slightly lower rate of tax than the tax relief you got on the way in (or no income tax if you die before age 75). Your estate pays inheritance tax on the amount in the pension but the tax saving (= tax relief rate in less tax rate out) mitigates that.

Either way you pay less inheritance tax than if the money hadn't gone into the pension and say had been put into an ISA until death, because of the tax saving.

Numerically I've given an example above of how that works.

I think you'd pay more inheritance tax but usually less tax overall. But there could be cases where more tax overall is paid, an example may be where the TFLS hasn't been taken and the member died over 75. 

Yes meant to say less overall tax after allowing for the income tax saving as well as the inheritance tax.

The inheritance tax would be higher because of the inheritance tax on the income tax net gain, but that still leaves the majority of that income tax gain. Didn't want to overcomplicate the explanation. It's easier to see that where the tax rate in and out are identical then the inheritance tax must be equal and work from there.

It is always possible to manufacture scenarios where a higher income tax rate is paid on the way out than the relief rate on the way into the pension. If someone hasn't taken any cash by 75 how likely is it they are using it for retirement provision? And in the very rare scenarios where there is a net income tax loss on the pension, it is likely we are talking about people with high income and high assets where any tax loss is not likely to be noticed by them financially.

zagfles

JustJ12345 said:

zagfles said:

JustJ12345 said:

I wonder how a DB benefit pension will be valued for IHT.

I would inherit a final salary pension entitlement from my partner if she died. We are not married  currently. But I am down as a dependent with her db pension scheme, so would get a small pension if she died.

So what value would be put on the pension income for IHT? 

None. Dependant scheme pensions aren't included, only lump sums. 

Thanks, I was wondering what "Dependent scheme pension" covered.

I do wonder if some DC schemes will switch to Dependent scheme pensions where there is a named dependent rather than leave it discretionary. I see the consultation includes DC and DB in that Dependent Pension exclusion.

I'm not sure how you could have a scheme pension from a DC scheme. Seems to be a contradiction in terms.

JustJ12345

Bolt1234 said:

What stops a spouse taking the pension pot tax free under the spousal exemption and then using a Deed of Variation to pass to say a son if they didn’t need the money after 2027.

 A couple who has a largely unused large pension pot is likely to have other assets, mortgage free home and then it never touches the surviving parents estate.

The deed of variation would mean the spouse never inherited the pension pot in the first place?

The pot would go straight to the son?

Bolt1234

Yes.  In the will the pension pot is left to the wife tax free.  She then uses a deed of variation to give some of the proceeds to her son within 2 years

JustJ12345

Bolt1234 said:

Yes.  In the will the pension pot is left to the wife tax free.  She then uses a deed of variation to give some of the proceeds to her son within 2 years

But I think that is the issue. 

The wife never inherits so can't claim the spouse exemption in the first place.

The net will after the deed of variation means she never got the pension pot in the first place.

JustJ12345

zagfles said:

JustJ12345 said:

zagfles said:

JustJ12345 said:

I wonder how a DB benefit pension will be valued for IHT.

I would inherit a final salary pension entitlement from my partner if she died. We are not married  currently. But I am down as a dependent with her db pension scheme, so would get a small pension if she died.

So what value would be put on the pension income for IHT? 

None. Dependant scheme pensions aren't included, only lump sums. 

Thanks, I was wondering what "Dependent scheme pension" covered.

I do wonder if some DC schemes will switch to Dependent scheme pensions where there is a named dependent rather than leave it discretionary. I see the consultation includes DC and DB in that Dependent Pension exclusion.

I'm not sure how you could have a scheme pension from a DC scheme. Seems to be a contradiction in terms.

The civil service partnership scheme is a DC scheme.

It is a DC scheme where you can name a dependent partner. So my partner could switch from her current DB scheme to a DC scheme for future contributions and I would be a dependent partner in both schemes.

Be interesting to see what the consultation responses say about this

DRS1

zagfles said:

DRS1 said:

coyrls said:

DairyQueen said:

I note that the IHT umbrella will also include death benefits (DB and DC schemes).

I am confused about the contents of Annex B of the consultation document.: 'Authorised Pension Death Benefits included in the value of an individual’s estate for Inheritance Tax from 6 April 2027". This table suggests that dependants' annuities will also be included within the IHT umbrella. Does this mean that, for example, income from an annuity bought via a DC/SIPP, which included a spousal pension, would somehow be valued for IHT purposes on the death of the main annuitant?

I doubt it because there is no IHT for transfers to spouses.

Yes but what if the annuity is not for a spouse?  And even if it is for a spouse do you have to value it to include it in the IHT calculation before you conclude there is no IHT on it?  How do you value that part of the annuity when what was bought originally was a joint lives annuity?

And how is it fair that a Dependants Scheme Pension is outside the IHT net?  How is that different?

Dependants scheme pensions are taxable on death at any age, so have always been treated differently. 

But surely that is Income Tax not IHT.  The fact that dependants annuities are subject to income tax does not seem to exempt them from the new IHT charge so why treat the dependants scheme pension differently?

DRS1

Bolt1234 said:

Yes.  In the will the pension pot is left to the wife tax free.  She then uses a deed of variation to give some of the proceeds to her son within 2 years

The will doesn't govern the pension pot's destination after death.  That is still down to the discretion or the scheme trustees/administrators and the expression of wishes from the member.  None of that is being changed only the tax law.

JustJ12345

DRS1 said:

zagfles said:

DRS1 said:

coyrls said:

DairyQueen said:

I note that the IHT umbrella will also include death benefits (DB and DC schemes).

I am confused about the contents of Annex B of the consultation document.: 'Authorised Pension Death Benefits included in the value of an individual’s estate for Inheritance Tax from 6 April 2027". This table suggests that dependants' annuities will also be included within the IHT umbrella. Does this mean that, for example, income from an annuity bought via a DC/SIPP, which included a spousal pension, would somehow be valued for IHT purposes on the death of the main annuitant?

I doubt it because there is no IHT for transfers to spouses.

Yes but what if the annuity is not for a spouse?  And even if it is for a spouse do you have to value it to include it in the IHT calculation before you conclude there is no IHT on it?  How do you value that part of the annuity when what was bought originally was a joint lives annuity?

And how is it fair that a Dependants Scheme Pension is outside the IHT net?  How is that different?

Dependants scheme pensions are taxable on death at any age, so have always been treated differently. 

But surely that is Income Tax not IHT.  The fact that dependants annuities are subject to income tax does not seem to exempt them from the new IHT charge so why treat the dependants scheme pension differently?

There have been a few news articles asking similar things about valuations etc. So you are not the only one with questions

JustJ12345

DRS1 said:

Bolt1234 said:

Yes.  In the will the pension pot is left to the wife tax free.  She then uses a deed of variation to give some of the proceeds to her son within 2 years

The will doesn't govern the pension pot's destination after death.  That is still down to the discretion or the scheme trustees/administrators and the expression of wishes from the member.  None of that is being changed only the tax law.

I have seen the will looked at when there is no expression of wishes form, but even in that case the schemes administrators can make their own judgement.

I have seen that in an estate where i was an executor for a younger brother.