Inheritance Tax on pensions - budget announcement and consultation

Albermarle

Tax_Slave said:

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?

That is not my reading of the link.
The pension will go to your spouse just the same ( assuming she is named as beneficiary) and will not be part of the IHT calculation due to spousal exemption. However if she withdraws from it, there will be income tax to pay if you die after 75 but not under 75, just the same as now.  That unusual rule was expected to go but seems not.

However that is only from a quick skim through and as mentioned there will be more discussion/consultation before any legislation goes through.

Bolt1234

Thanks Marcon.  Unless I get run over by a bus he will go first (he is 60) because of his diagnosis.  

Yes, I did see that consoltation document.  Blimey.  Someone was busy before the budget writing all of that.  

I probably would say this but if Labour start excluding assets from your late spouse it will get horribly confusing.  What is included in estate and what isnt when left to a husband/wife.   I guess Labour saw some low hanging fruit and just thought we will get the pension providers to do all the work for us and then give us the inheirtance tax without really havent to do very much.  Surely charges to do all this work will come through to the pension holders too!

Bolt1234

To be clear.  He has a diagnosis of 3-4 years from now.

Tax_Slave

Ahhhh
Pensions do confuse me.

I die before age of 75.
So under the new rules my wife inherits my pension fund tax free (IHT at zero rate).
Pension company pays my wife a lump sum of £250,000 free of tax (pension fund is £250,000).

I die after 75 (unlikely).
Under new rules my wife doesn’t pay IHT on pension fund of £250,000.
Pension company pays my wife a lump sum minus tax (20% ?) on £250,000.

What happens if someone leaves pension fund to say a cousin and dies at 80.
Does the cousin pay IHT and income tax on the pension fund is say it was worth £500,000?

Tax_Slave

Bolt1234 said:

To be clear.  He has a diagnosis of 3-4 years from now.

You could be my wife writing this.
I’m 62 and expect 3-4 years (depending on drugs working and new ones coming onto the market).
Does he have myeloma?

Pat38493

Tax_Slave said:

Ahhhh
Pensions do confuse me.

I die before age of 75.
So under the new rules my wife inherits my pension fund tax free (IHT at zero rate).
Pension company pays my wife a lump sum of £250,000 free of tax (pension fund is £250,000).

I die after 75 (unlikely).
Under new rules my wife doesn’t pay IHT on pension fund of £250,000.
Pension company pays my wife a lump sum minus tax (20% ?) on £250,000.

What happens if someone leaves pension fund to say a cousin and dies at 80.
Does the cousin pay IHT and income tax on the pension fund is say it was worth £500,000?

Almost - in the second example your wife would inherit the pension before tax, so would pay tax at her marginal rate whenever she decided to take some or all of the pension out.

If you leave the pension to a cousin, and die at 80, the cousin could inherit the pension before tax just like your wife, but if your entire estate (including the pension) exceeds the relevant IHT thresholds in your particular case, there would be IHT to pay one way or another - the details of how this would happen is presumably part of the consultation.

Under the current regime up to 2027, your cousin would inherit the pension as a taxable pension, but no IHT would be payable on that pension, even if your estimate excluding pensions was subject to IHT.  Income tax would still be payable though (if death above 75).

Bolt1234

So the under 75/over 75 rule is going in April 2027? 

Pensions will  all be treated as part of your estate to leave to your wife BUT maybe Labour will decide that pensions are different within your estate and will tax accordingly.  A very dangerous position to play because what will be next that you leave to your wife  but is still subject to IHT?  ISA's, second homes, their share of the family house (very unlikely but they are tax grabbing!)

Albermarle

I die after 75 (unlikely).
Under new rules my wife doesn’t pay IHT on pension fund of £250,000.
Pension company pays my wife a lump sum minus tax (20% ?) on £250,000.

She will only pay income tax on withdrawals, either regular small ones or one big one .

However if some of that pot remains unused when she dies it will now count towards her IHT calculation.
As with most married couples/civil partners it is on the second death when the IHT bill comes ( assuming you get one) 

Tax_Slave

Pat38493 said:

Tax_Slave said:

Ahhhh
Pensions do confuse me.

I die before age of 75.
So under the new rules my wife inherits my pension fund tax free (IHT at zero rate).
Pension company pays my wife a lump sum of £250,000 free of tax (pension fund is £250,000).

I die after 75 (unlikely).
Under new rules my wife doesn’t pay IHT on pension fund of £250,000.
Pension company pays my wife a lump sum minus tax (20% ?) on £250,000.

What happens if someone leaves pension fund to say a cousin and dies at 80.
Does the cousin pay IHT and income tax on the pension fund is say it was worth £500,000?

Almost - in the second example your wife would inherit the pension before tax, so would pay tax at her marginal rate whenever she decided to take some or all of the pension out.

If you leave the pension to a cousin, and die at 80, the cousin could inherit the pension before tax just like your wife, but if your entire estate (including the pension) exceeds the relevant IHT thresholds in your particular case, there would be IHT to pay one way or another - the details of how this would happen is presumably part of the consultation.

Under the current regime up to 2027, your cousin would inherit the pension as a taxable pension, but no IHT would be payable on that pension, even if your estimate excluding pensions was subject to IHT.  Income tax would still be payable though (if death above 75).

One final question.
I’m sure my pension fund provider Legal & General don’t allow you to keep pension invested when I die and will pay my wife out in a lump sum aka £250,000.
if I die after 75 and this is taxed , then will higher rate tax rates also apply to some of the payout?
Or will it all be at 20% lower tax rate?

HappyHarry

Bolt1234 said:

So the under 75/over 75 rule is going in April 2027? 

Pensions will  all be treated as part of your estate to leave to your wife BUT maybe Labour will decide that pensions are different within your estate and will tax accordingly.  A very dangerous position to play because what will be next that you leave to your wife  but is still subject to IHT?  ISA's, second homes, their share of the family house (very unlikely but they are tax grabbing!)

No - the under / over 75 rule applies to income tax and is remaining. If you die before 75 then your beneficiary can draw their inherited pension funds free from income tax, but if you’re over 75 when you die then your beneficiaries will pay income tax on any withdrawals they make from their inherited pension.

The consultation quite strongly implies that pension funds will attract IHT at 40% (to be paid direct from the pension fund) and a spouse’s exemption exists as per other assets.