Inheritance Tax on pensions - budget announcement and consultation

tim9333

Albermarle said:

That is not correct.

All pension pots whenever you die will be counted towards any IHT liability.

However the beneficiary of a pension pot of someone who dies under 75, can be withdrawn with no income tax to pay, although as from April 2027 the pot might be smaller if the person dying was liable for IHT .

Case study 4 in the consultation says there is no inheritance tax to pay if the pension fund passes to the civil partner?

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. 

https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment#annex-b-authorised-pension-death-benefits-included-in-the-value-of-an-individuals-estate-for-inheritance-tax-from-6-april-2027

MarzipanCrumble

Drawing down  - yes, maybe.  I like to keep things simple and the SIPP will maybe make me come near the £2 mil bracket (house, ISAs, savings etc).  If I don't spend (and please believe me, I find it very very difficult to spend - I am a saver, and it hurts me to spend unless I can see a justifiable reason for it - holiday is not justifiable).  I am in good health.

So thanks - I really will take on your input and talk it through with IFA.

ukdw

Linton 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? 

A DB pension is not an asset that can be inherited.  It really is no different to an annuity, just an ongoing income that comes under income tax. The DB pension may include a pension for the spouse of the deceased, but that again is just a separate taxable income stream that a spouse receives in their own right not an inherited asset.

Guaranteed annuities can be inherited if the purchaser dies before the guarantee has expired. Fairly long guarantees such as 30 years are available.

MarzipanCrumble

ohhh - food for thought.   

Albermarle

tim9333 said:

Albermarle said:

That is not correct.

All pension pots whenever you die will be counted towards any IHT liability.

However the beneficiary of a pension pot of someone who dies under 75, can be withdrawn with no income tax to pay, although as from April 2027 the pot might be smaller if the person dying was liable for IHT .

Case study 4 in the consultation says there is no inheritance tax to pay if the pension fund passes to the civil partner?

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. 

https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment#annex-b-authorised-pension-death-benefits-included-in-the-value-of-an-individuals-estate-for-inheritance-tax-from-6-april-2027

Yes that is correct, I should have taken account of spousal exemption.
However  it is not connected to at what age a person dies, as your original post indicated.

Linton

ukdw said:

Linton 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? 

A DB pension is not an asset that can be inherited.  It really is no different to an annuity, just an ongoing income that comes under income tax. The DB pension may include a pension for the spouse of the deceased, but that again is just a separate taxable income stream that a spouse receives in their own right not an inherited asset.

Guaranteed annuities can be inherited if the purchaser dies before the guarantee has expired. Fairly long guarantees such as 30 years are available.

 How is such a guaranteed annuity taxed? If it goes to the deceased’s estate as a lump sum it would come under IHT or if it goes to the beneficiary it would be taxed as income just like a spouses DB pension or spouses benefits from an annuity.  So I don’t see any difference in principle. The guaranteed annuity itself is not an inheritance.

Triumph13

A wrinkle that concerns me is that some people will fail to really understand how a SWR works and gift too much too early.  Leaving the excess gains from the good years invested is what protects you from subsequent poor market performance. If people start gifting that excess to avoid IHT, they could be unwittingly taking on more risk than they are comfortable with.

Albermarle

Triumph13 said:

A wrinkle that concerns me is that some people will fail to really understand how a SWR works and gift too much too early.  Leaving the excess gains from the good years invested is what protects you from subsequent poor market performance. If people start gifting that excess to avoid IHT, they could be unwittingly taking on more risk than they are comfortable with.

Plus maybe not enough to pay expensive care home fees if needed.
You are right though in a bid to avoid tax, what could be bad decisions could be made.

JayRitchie

ukdw said:

Linton 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? 

A DB pension is not an asset that can be inherited.  It really is no different to an annuity, just an ongoing income that comes under income tax. The DB pension may include a pension for the spouse of the deceased, but that again is just a separate taxable income stream that a spouse receives in their own right not an inherited asset.

Guaranteed annuities can be inherited if the purchaser dies before the guarantee has expired. Fairly long guarantees such as 30 years are available.

The extended guarantees sound interesting. How might I go about looking into them?

Acromion

Albermarle said:

Triumph13 said:

A wrinkle that concerns me is that some people will fail to really understand how a SWR works and gift too much too early.  Leaving the excess gains from the good years invested is what protects you from subsequent poor market performance. If people start gifting that excess to avoid IHT, they could be unwittingly taking on more risk than they are comfortable with.

Plus maybe not enough to pay expensive care home fees if needed.
You are right though in a bid to avoid tax, what could be bad decisions could be made.

Yep, of course the tax avoidance tail shouldn’t wag the investment dog but the sudden unexpected 40% on a hitherto legitimate IHT avoidance strategy - OK, so shoot me! - makes that rational take quite a hard sell.