Advice on IHT Please post budget

princess23

Hi my DH and I jointly own our home of residence along with jointly owning a second property. My husband also has a pension pot currently valued at £370k with five years of employment left to go before retiring. Our question is based on the above and the spouse exception rules would I have to pay any inheritance tax on any of the three items listed should my DH pass first as I will only have a state pension. In terms of the values of the properties we are looking at currently £400k for each at this time.  As we understand it the properties would be covered by the spouse exception rule but the pension would be inside the IHT individual allowance could anybody comfort if this is correct. Many thanks for any help and advice you can share. 

Keep_pedalling

Hopefully this will be many years away and the rules may be very different by the, however spousal exemption will still apply to all assets under the proposed changes.

Marcon

princess23 said:

Hi my DH and I jointly own our home of residence along with jointly owning a second property. My husband also has a pension pot currently valued at £370k with five years of employment left to go before retiring. Our question is based on the above and the spouse exception rules would I have to pay any inheritance tax on any of the three items listed should my DH pass first as I will only have a state pension. In terms of the values of the properties we are looking at currently £400k for each at this time.  As we understand it the properties would be covered by the spouse exception rule but the pension would be inside the IHT individual allowance could anybody comfort if this is correct. Many thanks for any help and advice you can share. 

Far too early to know what will happen in respect of pensions. Until the legislation is actually passed - and we are a long way away from that - anything posted here in this respect is just speculation. The proposal in yesterday's budget won't come in until 2027 at the earliest.

Triumph13

I have yet to hear anyone from any party suggest imposing IHT on anything left to a spouse.  Nothing is impossible, but it would have to be exceedingly unlikely.

Under the current rules, if DH died before turning 75 you would get the whole of his pension tax free.  If he died after 75 you would have to pay income tax on anything you drew from it.  Many people were surprised that the pre-75 treatment wasn't done away with yesterday, so there has to be a reasonable chance that it will go at some point.  Hopefully that will be irrelevant to you anyway.

Grumpy_chap

Triumph13 said:

Many people were surprised that the pre-75 treatment wasn't done away with yesterday, so there has to be a reasonable chance that it will go at some point. 

Maybe it will be the reverse.

An individual over 75 and in IHT territory.
£100k in ISA incurs IHT at 40% but no further taxation on the remaining capital.
£100k in SIPP incurs IHT at 40% plus income tax at marginal rate when drawn by the recipient.

SnowMan

Grumpy_chap said:

Triumph13 said:

Many people were surprised that the pre-75 treatment wasn't done away with yesterday, so there has to be a reasonable chance that it will go at some point. 

Maybe it will be the reverse.

An individual over 75 and in IHT territory.
£100k in ISA incurs IHT at 40% but no further taxation on the remaining capital.
£100k in SIPP incurs IHT at 40% plus income tax at marginal rate when drawn by the recipient.

An individual over 75 and in IHT territory.
£100k in ISA incurs IHT at 40% but no further taxation on the remaining capital.

£100k in SIPP incurs IHT at 40% has had marginal rate tax relief on the way in plus income tax at marginal rate when drawn by the recipient.

It seems reasonable that the pre age 75 death withdrawals by the recipient are not subject to income tax. 

Firstly there may be a greater financial need for the dependants if death is at a younger age. 

And secondly tax free cash may not have been taken by the deceased before death (whereas by age 75 the expectation is they should have done). Perhaps an individual planned to retire and access their pension at 65 and died at 64. So adding income tax to the withdrawals by the recipient (where there would be no no tax free element) will have deprived the deceased or their dependants from any tax free amount from their pension.

LHW99

£100k in SIPP incurs IHT at 40% has had marginal rate tax relief on the way in plus income tax at marginal rate when drawn by the recipient.

The problem occurs when the owner of the pot has been a BR taxpayer, whereas the recipients (children) may be at a higher rate. Granted possibly a small number, but the double tax will sting.

Qyburn

LHW99 said:

The problem occurs when the owner of the pot has been a BR taxpayer, whereas the recipients (children) may be at a higher rate. Granted possibly a small number, but the double tax will sting.

The recipients aren't forced to take so much it takes them into HR tax, that's entirely their choice.

Qyburn

SnowMan said:

It seems reasonable that the pre age 75 death withdrawals by the recipient are not subject to income tax. 

Firstly there may be a greater financial need for the dependants if death is at a younger age. 

If the threshold was age 40 or 50 that might make sense, and a sliding scale rather than a cut off even more so. I can't imagine anyone seriously thinks a 74 year has so much greater need to look after their dependants, a need which magically disappears on their 75th birthday.

Personally if it was my decision I'd ditch the more favourable under 75 treatment, but retain any remaining tax free cash in the inherited pension. That way a surviving spouse can draw from their inherited pension on pretty much the same terms as their late partner had. That seems a sensible goal.

LHW99

Qyburn said:

LHW99 said:

The problem occurs when the owner of the pot has been a BR taxpayer, whereas the recipients (children) may be at a higher rate. Granted possibly a small number, but the double tax will sting.

The recipients aren't forced to take so much it takes them into HR tax, that's entirely their choice.

As I said, a small number, but if it is an early death, where children are in their 40's / 50's and higher rate it could well happen, unless they are able to postpone taking withdrawals / or pass it directly to grandchildren by deed of variation.

mgdavid

Qyburn said:

SnowMan said:

It seems reasonable that the pre age 75 death withdrawals by the recipient are not subject to income tax. 

Firstly there may be a greater financial need for the dependants if death is at a younger age. 

If the threshold was age 40 or 50 that might make sense, and a sliding scale rather than a cut off even more so. I can't imagine anyone seriously thinks a 74 year has so much greater need to look after their dependants, a need which magically disappears on their 75th birthday.
.........

Surely it's not just about looking after dependents? My take is that retirement is a time to enjoy life to the full and do lots of the things one had neither time nor money for whilst working and raising a family. But the years and health start to catch up with you so the emphasis is on getting on with it as soon after retirement as possible. Later on you may/will be restricted in capability so the spend need will decrease.