Inheritance Tax on pensions - budget announcement and consultation

DullGreyGuy

Workerdrone said:

Am I correct in this. If so it's absolutely shocking.

Is it really?

In your example that £500k in ISA already had income tax taken from it before it was paid into the account and assuming it was subject to IHT would then have the 40% taken off it too. As we aren't talking about a spouse the £500k comes out of the ISA wrapper and so the majority of future interest will incur tax. Not that different from those that put money into a pension rather than an ISA so never paid income tax on the way in and now will pay IHT and income tax on the way out. 

If we put aside the more fundamental question of if IHT should exist at all doesn't it seem fairer that all forms of savings are treated equally? 

Pat38493

Workerdrone said:

DairyQueen said:

Madeinireland101 said:

I've currently got an expression of wish on my 2 DC pensions saying 50% to my wife and 25% to each of the children.

1. if I’m reading this all correctly it appears I’d be better off combining the schemes and changing the EOW to put 100% to my wife. Is that correct?

2. Also it appears to me that there is no point in keeping the money in a pension at all now - may as well start by extracting the tax free 25% by £40k a year and putting it in two ISA’s for me and the wife. Then extracting the rest gradually up to the 40% limit to wind the pensions down completely if I can. Might be worth keeping anything that might result in 40% tax as if I pass it eventually to kids then they might have a lower tax bracket to use.

3. Will now also look to use gifting to give away as much as possible to the kids too. Pensions appear to be finished from my point of view unless someone can tell me the benefit of keeping one? ISA’s will be more flexible.

We are thinking along the same lines.

Problem being that unwrapping the pension will likely incur income tax, and that ISAs will still form part of your estate. Whether to leave wrapped will depend on the identity of the beneficiary and whether you/they would incur more tax.

For example, if you are under 75 and spouse is 100% beneficiary then s/he will inherit free of IHT and income tax if you die before your 75th birthday. If, OTOH, you are a widow/er/single and are over 75 then your pension could be subject to a heinous IHT tax charge and then subject to additional (income) tax on-top by beneficiaries when they drawdown.

Our inheritance plans are totally screwed by this budget. We are not wealthy but we were hoping to leave a reasonable sum to my nephews and to OH's daughters and grandson. They are the generation that will suffer. 

Socialists hate inherited wealth but, Lord's sake, is it really necessary to destroy Millennials and Gen Z's inheritance in this way? 

The real losers from this are the children of wealthy boomers.

Depends partly on behavioral changes.

I saw an apparently famous old quote that might be relevant from an old chancellor "'Inheritance tax is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue"

marycanary

Workerdrone said:

DairyQueen said:

Madeinireland101 said:

I've currently got an expression of wish on my 2 DC pensions saying 50% to my wife and 25% to each of the children.

1. if I’m reading this all correctly it appears I’d be better off combining the schemes and changing the EOW to put 100% to my wife. Is that correct?

2. Also it appears to me that there is no point in keeping the money in a pension at all now - may as well start by extracting the tax free 25% by £40k a year and putting it in two ISA’s for me and the wife. Then extracting the rest gradually up to the 40% limit to wind the pensions down completely if I can. Might be worth keeping anything that might result in 40% tax as if I pass it eventually to kids then they might have a lower tax bracket to use.

3. Will now also look to use gifting to give away as much as possible to the kids too. Pensions appear to be finished from my point of view unless someone can tell me the benefit of keeping one? ISA’s will be more flexible.

We are thinking along the same lines.

Problem being that unwrapping the pension will likely incur income tax, and that ISAs will still form part of your estate. Whether to leave wrapped will depend on the identity of the beneficiary and whether you/they would incur more tax.

For example, if you are under 75 and spouse is 100% beneficiary then s/he will inherit free of IHT and income tax if you die before your 75th birthday. If, OTOH, you are a widow/er/single and are over 75 then your pension could be subject to a heinous IHT tax charge and then subject to additional (income) tax on-top by beneficiaries when they drawdown.

Our inheritance plans are totally screwed by this budget. We are not wealthy but we were hoping to leave a reasonable sum to my nephews and to OH's daughters and grandson. They are the generation that will suffer. 

Socialists hate inherited wealth but, Lord's sake, is it really necessary to destroy Millennials and Gen Z's inheritance in this way? 

The real losers from this are the children of wealthy boomers.

Won't somebody please think of the children?

JoeCrystal

You know, considering the number of topics discussing IHT on pension funds... I am thinking that the government made a right call. 😀

Looking forward to endless stream of same topic in 2027 and onwards! 😀

Albermarle

Workerdrone said:

I accept we are still waiting for the dust to settle, but Martin Lewis's article on this seems to suggest a recipient could end up paying both IHT and income tax on an inherited pension.

Take the scenario. Husband and wife have a £770k house, 500k in isas and 500k in pension. On the first death all the assets pass to the surviving spouse. with no iht. The second death occurs beyond the age of 75.

The couple benefit from the NRB and the RNRB so the first 1m of their estate is outside of IHT

As I understand it the remaining 770k which comes largely from the pension element will be subject to tax at 40%

so there is a tax charge of £308k straight away, but if I understand it correctly, the recipient, in this case the children or grandchildren are then further taxed on their nominal rate. If we consider they are likely still working it doesn't take much to push them now into the 40% tax bracket, hence a further £184k gets taken in tax, so from the 770k pot £492k is clawed back in taxes? Leaving only £278k as a net result.

Am I correct in this. If so its absolutely shocking.

I do not think the statement in bold is correct.

My understanding in this scenario is as follows.

Total assets  £1.77 Million. So £770K subject to 40% IHT = £308K

This liability will then be apportioned to either the pension pot or to the rest of the estate in the ratio 500 to 1270.
So £87K to be paid from the pension and £220K from the rest of the estate.

That seems to be the general idea AIUI.

sabinamatter

I am leaving my SIPP pot to my two children equally. They will have to pay inheritance tax as the estate is over 325k AND income tax on the remainder. Won't be much left surely !!
This is double taxation. 

Albermarle

Grumpy_chap said:

artyboy said:

And that is the key point, it will create a de facto relationship and dependency between pension trustees and estate executors/administrators that doesn't currently exist. I can't imagine trustees will be thrilled at the idea...

The simplest thing seems to be this:
- holder of DC pension died
 - trustees establish surviving spouse Y / N
- if N, trustees deduct IHT at 40% and pay to HMRC.
 - trustees pay balance to Executors account.
 - executor deals with the pension value in the same way as any other asset of the estate
- executor calculated total IHT due.  Deduct that already paid by pension trustees.  Pay balance to HMRC (or claim refund if overpaid)
- executor distributes estate 

What if the total estate, including the pension, was not actually liable for IHT ?
It would not then be correct for the pension provider to have extracted 40% from the pot first.
In any case as per my above post, even if the overall estate was liable for IHT, it does not necessarily mean the pension pot will get hit  by 40% tax on the whole pension pot. Very unlikely in fact.

sabinamatter

Sorry should have said I am 77.

SnowMan

Workerdrone said:

I accept we are still waiting for the dust to settle, but Martin Lewis's article on this seems to suggest a recipient could end up paying both IHT and income tax on an inherited pension.

Take the scenario. Husband and wife have a £770k house, 500k in isas and 500k in pension. On the first death all the assets pass to the surviving spouse. with no iht. The second death occurs beyond the age of 75.

The couple benefit from the NRB and the RNRB so the first 1m of their estate is outside of IHT

As I understand it the remaining 770k which comes largely from the pension element will be subject to tax at 40%

so there is a tax charge of £308k straight away, but if I understand it correctly, the recipient, in this case the children or grandchildren are then further taxed on their nominal rate. If we consider they are likely still working it doesn't take much to push them now into the 40% tax bracket, hence a further £184k gets taken in tax, so from the 770k pot £492k is clawed back in taxes? Leaving only £278k as a net result.

Am I correct in this. If so its absolutely shocking.

First thing to say is that the 500K in the pension has had tax relief at somewhere between perhaps say 20% and 40% when it went into the pension. Let's say 30% so they really started out with an investment that would only have been worth say 350K (if 30% on average) if the money had say been put into ISAs instead with the same returns.

Secondly if the first death (let's say it was the husband) occurred before age 75, then the wife could have cashed in the whole of the husband's pension at death with no tax, and the surviving spouse could also taken out a 25% tax free lump sum from their own pension. Because this incurred tax on this part is zero compared with the say 30% tax relief that is a huge gain from the pension route that you haven't allowed for in the calculations.

Then if the child is working and paying basic rate as intimated then they should only access enough of the inherited pension each year so as to ensure they didn't move into higher rate tax or they could wait until they gave up work to access the inherited pension.

If you were to crunch the numbers they would be hugely better off between them all than if they had invested the original 350K in ISAs say with the same returns, that is allowing for tax relief, the tax on the way out on the inherited pension and inheritance tax on second death.

If the husband actually also died after age 75 then he should have already taken his own 25% tax free lump sum before death. If he didn't then he made a tax mistake (which has nothing to do with the change in pension rules). And his wife should also have taken the 25% from her own pension before her death. And that tax free money is money on which they've had tax relief. There will be a significant saving in tax (versus the tax relief on the way into the pension) through doing that. And overall it's hard to see how they will be worse off overall allowing for inheritance tax, tax relief and income tax paid than if they had put the money in an ISA, especially if the child is careful when to take the money out of the inherited pension. There won't be quite the gain of the first scenario but I suspect there won't be a loss.  

Edit this is my rough and ready first attempt to model the situation (both die over 75 scenario). Don't take it as definitive, it's an assumption driven stab at a possible answer with possible errors, but £28,000 better off overall if money invested in a pension rather than an ISA  

tim9333

Workerdrone said:

so there is a tax charge of £308k straight away, but if I understand it correctly, the recipient, in this case the children or grandchildren are then further taxed on their nominal rate. If we consider they are likely still working it doesn't take much to push them now into the 40% tax bracket, hence a further £184k gets taken in tax, so from the 770k pot £492k is clawed back in taxes? Leaving only £278k as a net result.

Am I correct in this. If so its absolutely shocking.

You are correct - the dependents face a marginal tax rate of 64% on accessing their inherited pension - double taxation at 40%

Is it shocking? - yes, when compared to current arrangements

But should pensions ever have been excluded from a deceased's estate?

The balance now is to drawdown your SIPP and gift ISAs to dependants to avoid IHT whilst still retaining sufficient flexibility for needs like care home fees