Inheritance Tax on pensions - budget announcement and consultation

Qyburn

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

The already well off children or grandchildren aren't forced to draw that much from the inherited pension.

tim9333

Albermarle said: 

As explained in my recent post and the one from Snowman. The IHT liability/nil rate band  will be shared out between pension and non pension assets, so that the  pension will not be subject to 40 % on the whole amount, just on a proportion of it.
So even if the beneficiary pays income tax on the remainder, the total tax take from the pension will not be as high as 64%. In most cases will be significantly less, but more than now of course !

Thanks for the correction - as you say, the nil rate band will be shared out across the asset base

DRS1

Bolt1234 said:

I have asked this before but as we are talking about children etc. 

My husband will pass away before 75.  He has a life limiting illness.  We have two grown up children.  I am the beneficary of his pension pot which is considerable. He wont be able to make use of it to fund his retirement because he wont be here.

What stops me taking it tax free as his spouse and then using a Deed of Variation to pass onto my grown up children.  What tax would they pay?  Is it a gift from me as long as I live 7 years?  I am relatively young for this to happen and have my own funds to cover my retirement.  I know - its unusual situation.  

I may have said this before but Deeds of Variation and pension schemes don't go together.  The Deed of Variation could apply to the estate outside the pension but not to the pension.  If you take the value of your husband's pension on his death before 75 then the spouse exemption should mean there is no IHT and the pre 75 death should mean there is no income tax.  You can then give what you want to the kids are hope to live 7 years (or use gifts from income).- no need for any Deed of Variation because it is your money you are giving away.

But I think if you really plan to do any of this you should talk to a lawyer first and get proper advice rather than the ramblings of strangers in a bulletin board.

Grumpy_chap

[Deleted User] said:

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 marginal IHT rate is 60%?

It seems simple that the standard IHT rate is applied which is currently 40%
https://www.gov.uk/inheritance-tax#:~:text=The standard Inheritance Tax rate,estate that's above the threshold.

The Executor would be responsible for setting the additional tax due from the Estate.

german_keeper

RogerPensionGuy said:

https://www.forbes.com/uk/advisor/investing/average-pension-pot-in-uk/#:~:text=Unbiased.co.uk-,Overall average,20,077 as of May 2024.

***

Posted the above on here as a point of reference about average pension pots at various stages of life/age.

The article mentions average and median picks a value, great information, I have friends & family from fairly similar backgrounds, jobs, kids, pay and houses in the current 50 to 70 years range, a few have no pension, maybe 40% have the average, maybe 40% double the average and 10/15% have 4, 5 or more times the average mostly because they became engaged in pension & AVC feeding early on by family or trusted friends and picked the pension extra route and stuck to it by and large and the last few or 5 years of paid employment filled pensions at maximum possible inputs reference their living needs and spare cash, they weren't getting anywhere near the AA or LTA limits, however with time and low cost pensions, a few have sailed past that last LTA figure that was essentially removed April 2024 and just the 268 25% LTA remains. 

Blimey, you must have very different conversations with friends and family than I do. I don't know anything like that amount of information. The only one that comes near is a good mate, a former work colleague and now my retirement walking partner, who I have helped over the last 10 years or so with his Civil Service pension and retirement planning in general.

A lot of our walking conversation centres around retirement and pension related stuff but not at the cost of the usual beer, women and football nonsense. I use that phrase as a colloquialism as he is actually teetotal!! 

Juno_Moneta

Industry reactions now starting to appear… 

Here’s one from an inheritance advisors body:

“Emily Deane TEP, Technical Counsel and Head of Government Affairs at STEP, the global membership body for inheritance advisors responds to the Autumn 2024 Budget:”

https://todayswillsandprobate.co.uk/autumn-budget-2024-initial-statement-and-reaction-from-step/

Albermarle

[Deleted User] said:

Albermarle said:

tim9333 said:

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  

As explained in my recent post and the one from Snowman. The IHT liability/nil rate band  will be shared out between pension and non pension assets, so that the  pension will not be subject to 40 % on the whole amount, just on a proportion of it.
So even if the beneficiary pays income tax on the remainder, the total tax take from the pension will not be as high as 64%. In most cases will be significantly less, but more than now of course !

I wouldn't rely on that being the case.  There are so many practical problems relying on having the pension scheme administrators paying an average rate (e.g. how will the PSA finding the PRs when there is no will and no one is rushing to get a letter of administration, how will the value of unlisted shares be determined to work out what IHT is due). There's also more unfairness in using an average rate where the beneficiaries under the will are different to the pension scheme beneficiaries.  Similarly, what happens to a pension discovered late (so increasing the average rate) or where there is the hassle of coordinating the average rate where someone has half-a-dozen pension pots, or the domicile status of the deceased / their spouse is unclear. 

I could see that this might change so that the PSA just operates a straightforward 40% IHT rate unless (i) the PRs provide pukka evidence as to the average rate, or (ii) the pension is paid to a surviving spouse (and probably only if they are domiciled in the UK, deemed domicile in the UK or the deceased was domiciled outside the UK).   However, for deaths over age 75 this would lead to less tax being raised and HMRC having to refund over payments of IHT.

You make some good points about the potential difficulties of the administration from April 2027, and hopefully after consultation and drafting of legislation, some items will become clearer.

However some posts on here and elsewhere, already seem to assume that if the deceased is liable for IHT overall, then the whole  pension pot will get hit by 40% tax. I was just making clear that this is not the basis of what is being proposed ( for now anyway ) .

leosayer

By my estimation, based on our current assets, if my wife and I die now then our estate would attract a £80k IHT bill.

After the change announced in the budget, the IHT bill would increase to £340k due to our pension pots.

Of course, if we deplete our pension pots during retirement as planned, then this will reduce the IHT bill. However if we die young then the full £340k will be payable.

I'm sure some will see this as a tax on dying young, but of course the reason would be that by dying young, we would leave a much larger inheritance.

artyboy

leosayer said:

By my estimation, based on our current assets, if my wife and I die now then our estate would attract a £80k IHT bill.

After the change announced in the budget, the IHT bill would increase to £340k due to our pension pots.

Of course, if we deplete our pension pots during retirement as planned, then this will reduce the IHT bill. However if we die young then the full £340k will be payable.

I'm sure some will see this as a tax on dying young, but of course the reason would be that by dying young, we would leave a much larger inheritance.

Meh... based on some fairly reasonable assumptions, these changes are likely to cost our estate a 7 figure sum  in additional IHT, unless we fundamentally change tack (which could mean heading off somewhere sunnier).

The problem is we're a very soft target given the argument that pensions are for retirement, not inheritance. But when you've been planning your estate for 10 years based on a legitimate set of rules, it's pretty galling when this happens.

As I've said elsewhere, successive governments are doing great damage to the idea of getting people to start planning early for their retirement. Who can have any confidence at all that further raids and restrictions aren't in the pipeline.

doodling

Hi,

Three points:

A ) To those complaining that the rules have changed, the time to complain was when the Lifetime Allowance wad abolished - that abolition made bringing pension savings with the scope of IHT pretty much inevitable.  If I was cynical I might speculate that this was a deliberate trap laid by the previous government for this one.

B ) I would have liked to have seen some kind of early death allowance, effectively allowing people to more robustly use pensions to make provision for their dependents in the event that they die before retirement age.  The age 75 stuff sort of does this but not so well.

C ) As scheme administrators are proposed to be liable for interest on IHT if it is not paid within 6 months then I would expect the default position to be that if probate isn't obtained within 3-4 months then the administrator will pay HMRC 40% and then attempt to let the executor sort it out.  The current plans are almost guaranteed to create friction between pension scheme administrators, pension scheme beneficiaries, executors and will beneficiaries.  Hopefully something more robust can be achieved through the consultation.