Inheritance Tax on pensions - budget announcement and consultation

coyrls

LHW99 said:

So currently, you make an expression of wishes for a DC pension, and it's not in your estate.

If you bequeath the pension by including it in your will, it will be reckoned with the estate and subject to IHT.

So after April 2027, will it matter which way you choose to say who you want the pension to go to?

Yes, because if it goes to my wife it will be IHT free.  If it goes to my son it will be liable for IHT.

Albermarle

LHW99 said:

So currently, you make an expression of wishes for a DC pension, and it's not in your estate.

If you bequeath the pension by including it in your will, it will be reckoned with the estate and subject to IHT.

So after April 2027, will it matter which way you choose to say who you want the pension to go to?

My reading of the info is that the trust status of a DC  pension pot will stay. So presumably it will not be included in a will, and you will still have to nominate beneficiaries.
The legislation is to allow that pension in trust be included in IHT calculations, not to put it in the estate as such.
That is only my thoughts though.

Albermarle

poseidon1 said:

HappyHarry said:

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.

Not quite my reading of the Technical consultation.

A full 40%  IHT charge on the pension fund only likely if the deceased's nil rate band has been fully utilised elsewhere within the primary estate. Otherwise, the pension fund shares a proportion of the NRB, and pays tax on the excess of that proportion.

A couple of the worked examples in the Tech Doc supports this. 

However there is some uncertainty as to what happens where the pension scheme hear of the death, but have heard nothing at all from the personal representatives ( possibly in the case of intestate estates where no PRs come forward with details of the estate). Will HMRC expect the pension scheme to assume no NRB and pay 40% within the 6 months deadline? 

This and other potential complications seems to be what the consultation is all about so no doubt all the trade bodies ( Law Society, Institute of Chartered Accountants, Society of Pension Providers etc) will all make their representations and suggestions.

What is for sure, and as mentioned elsewhere on this forum, pension scheme admin costs will almost certainly rise to cover extra staffing, training and administration of this new IHT compliance regime the change will necessitate.

Those of us with SIPPs ( DIY or otherwise), will need to be alert to possible fee increases between now and 2027.

Looking further ahead, ensuring executors have what they need to quickly identify , collate and access details of  ones assets and liabilities will become even more important given the expected new duty to liase closely with pension scheme trustees in determining IHT exposure.

Also will be simpler just to leave one DC pot behind, rather than multiple ones.

DairyQueen

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?

coyrls

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.

Madeinireland101

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.

af1963

Madeinireland101 said:

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.

Tax relief at your marginal rate on adding the money, and 25% tax free when withdrawing. As previously.

DairyQueen

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? 

SkylineExplorer

It seems this change could simplify things for those leaving pensions to spouses, but it definitely raises concerns for non-traditional family structures.

It will be interesting to see if further clarifications or amendments address unmarried partners and other modern family dynamics, especially as so many fall outside the 'married spouse' model. A lot of us are hoping for more flexibility in the final guidance

Majic

Would anyone care to advise about SASS. What happens in April 27 with the value of them when someone dies. For example a few years ago when someone put their pensions into a SASS to buy a commercial property which was then let to a tenant who paid a rent to the SASS. What will count in this case in terms of their estate:
1) None of it
2) The cash element of the SASS (i.e. the rents received)
3) The cash element and the value of the cost of the commercial property bought via the SASS