Inheritance Tax on pensions - budget announcement and consultation

LHW99

Albermarle said:

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.

What I can't quite get my head around is the idea that it can remain "not part of the estate", and yet be brought into the IHT regime - which I thought required aggregating all "wealth" and calculating what IHT if any was due.

If the remaining pension is to be added in to the IHT calculation, then ISTM that it effectively becomes "part of the estate",

If it quacks like a duck ......... etc

SnowMan

RogerPensionGuy said:

Is the below possible. 

I take out say 1M from my DC pot and say pay 40% income tax on it, so 600K.

I give that 600K to a child for example. 

I expire 2 months later and that 600K is in my estates IHT. 

So 40% of that 600K needed to pay of the government. 

So 600K minus 240K.

So in those few months, 1M becomes 360K.

Thats an effective tax rate of 64% if the above is anywhere possible or correct. 

It's not really correct.

You started out with £600,000 and received 40% tax relief to get the amount up to the £1,000,000 you mention. You cash in that pension get £250,000 tax free cash and pay 40% tax on the £750,000 remainder (£300,000 tax) leaving you with £700,000 which you give to a child. You have other assets over the inheritance tax threshold so your estate pays £700,000 x 0.4 = £280,000 in inheritance tax so net amount allowing for the gift is £420,000 (£700,000 - £280,000) which is £180,000 less than the £600,000 you started with.

So the effective inheritance tax rate on your £600,000 is 180,000/600,000 = 30%

So you've done well out of the pension because had you not put it in the pension your estate would have paid 40% inheritance tax rather than 30%.

It's very annoying because you had identified a way to avoid inheritance tax (leaving the money in the pension) which you reasonable were going for until they changed the rules, but they changed the rules, so you took the money out of the pension and you still gained but not by anything like as much as you would otherwise.

    

CSL0183

SnowMan said:

RogerPensionGuy said:

Is the below possible. 

I take out say 1M from my DC pot and say pay 40% income tax on it, so 600K.

I give that 600K to a child for example. 

I expire 2 months later and that 600K is in my estates IHT. 

So 40% of that 600K needed to pay of the government. 

So 600K minus 240K.

So in those few months, 1M becomes 360K.

Thats an effective tax rate of 64% if the above is anywhere possible or correct. 

It's not really correct.

You started out with £600,000 and received 40% tax relief to get the amount up to the £1,000,000 you mention. You cash in that pension get £250,000 tax free cash and pay 40% tax on the £750,000 remainder (£300,000 tax) leaving you with £700,000 which you give to a child. You have other assets over the inheritance tax threshold so your estate pays £700,000 x 0.4 = £280,000 in inheritance tax so net amount allowing for the gift is £420,000 (£700,000 - £280,000) which is £180,000 less than the £600,000 you started with.

So the effective inheritance tax rate on your £600,000 is 180,000/600,000 = 30%

So you've done well out of the pension because had you not put it in the pension your estate would have paid 40% inheritance tax rather than 30%.

It's very annoying because you had identified a way to avoid inheritance tax which you reasonable went for, but they changed the rules and you still gained but not by anything like as much as you would otherwise.

    

Income tax rate would be 45% on this, not 40%

Madeinireland101

I think a lot of young people are going to do quite well out of all this. I’d imagine a lot of gifts this Xmas. 

SnowMan

CSL0183 said:   

Income tax rate would be 45% on this, not 40%

Fair point. Although in reality you would take it out over over a number of years to reduce your tax rate to 40%. If you take it out in one go you are the cause of the extra tax.

You wouldn't expect to withdraw the money from the pension at a higher rate of tax than you got in the original tax relief, so I was just trying to use the same rate for both so as not to overstate the benefit of the pension.

Bolt1234

With those sorts of returns why not just spend and enjoy yourself rather than doing the responsible thing and save in a pension. Then when it’s time for funded care - well just put your hand out for state help!

How has £100k turned into £22k for the receipant?

coyrls

Bolt1234 said:

With those sorts of returns why not just spend and enjoy yourself rather than doing the responsible thing and save in a pension. Then when it’s time for funded care - well just put your hand out for state help!

How has £100k turned into £22k for the receipant?

Saving in a pension is for income in retirement.  None of the measures announced will have any effect on income in retirement.

DRS1

coyrls said:

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.

Yes but what if the annuity is not for a spouse?  And even if it is for a spouse do you have to value it to include it in the IHT calculation before you conclude there is no IHT on it?  How do you value that part of the annuity when what was bought originally was a joint lives annuity?

And how is it fair that a Dependants Scheme Pension is outside the IHT net?  How is that different?

Qyburn

coyrls said:

Saving in a pension is for income in retirement.  None of the measures announced will have any effect on income in retirement.

Spot on. All this wailing "a pension is now a waste of time" is from people misusing the pension regime as IHT avoidance rather than retirement planning.

poseidon1

Majic said:

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

One of the quirks the technical consulting process will address.

However, my thinking it would be logical to treat the ssas asset in the same way as if you personally owned it at date of death. That is to say:

1 ) Market value of the property and all undistributed cash at date of death, potentially liable to IHT.

2) The proportion of IHT assessable on the property, attracts the 10 year instalment option. If rent together with the remnants of the cash are sufficient to cover the annual  instalments ( plus interest), all well and good - beneficiaries have the option to retain the property, but it won't generate much by the way of distributable income  in their favour going forward.

3) If insufficient cashflow to pay iht on instalments, and the ssas faces difficulties borrowing to pay the tax, then like any other property personally held in an estate in the same circumstances, ssas becomes a forced seller of the property to pay the tax.

Now the above outcomes might be considered reasonable ( by HMRC) for a ssas covering a single member, but what about group ssas holding a single property? How does the ssas trustees reconcile IHT they have to find  for a deceased member's tax exposure, with the commitment to provide continued pension benefits for the remaining members? Some form of group life assurance might have helped to provide a lump sum for the tax, but under the draft proposals, lump sum death benefits also under the IHT cosh.

Ssas trustees will no doubt be seeking special treatment and reliefs  for the group ssas conundrum.