Inheritance Tax Question - Post 2027

Fermion

I've tried reading part of the Consultation document IHT and DC Pension pots post 2027 but I'm confused.

Assuming the DC pension is fully crystallised and the deceased is post 75, the document seems to imply a double taxation of IHT on the pension (which the pension scheme administrator would calculate and pay) and then if the residue pot is passed the beneficiaries they would then pay tax at their marginal rate for any withdrawals.

However if the deceased simply declared that they wanted the DC pot on death to be part of their estate and liquidated, wouldn't the only charge on the pot be IHT (as with the rest of the estate)? That would avoid double taxation.

Have I missed something??

zagfles

What makes you think you can simply declare the pot to be part of the estate to avoid the beneficiaries paying income tax? 

Albermarle

The pension is held in trust, so can not be part of your estate.

squirrelpie

Fermion said:

Assuming the DC pension is fully crystallised and the deceased is post 75, the document seems to imply a double taxation of IHT on the pension (which the pension scheme administrator would calculate and pay) and then if the residue pot is passed the beneficiaries they would then pay tax at their marginal rate for any withdrawals.

However if the deceased simply declared that they wanted the DC pot on death to be part of their estate and liquidated, wouldn't the only charge on the pot be IHT (as with the rest of the estate)? That would avoid double taxation.

Have I missed something??

As zagfles says, you can't declare it part of your estate. You'd have to withdraw it first (and pay tax in doing so).

The reason is simple. Normally you effectively get income tax relief when you pay money into your pension, and you pay the income tax when you draw it out (except for the 25% tax free perk). So it's fair/sensible that anybody that inherits your pension has to pay income tax on it when they draw it out. The new change is that it is valued along with your estate for inheritance tax, which also seems reasonable to me, although very annoying.

So there isn't double taxation, because there was 'reverse taxation' when you put the money in the pension.

LHW99

So there isn't double taxation, because there was 'reverse taxation' when you put the money in the pension.

There could be. For our own SIPP pensions, neither I nor OH have been more than basic rate taxpayers (except OH for a single year). Others will be the same, maybe not a majority, but a significant minority, so the tax relief will also have only been given at basic rate.

It is quite possible that a) any estate + pension residue will be liable to IHT, due to rises in property values and b) the inheritors are (40% / 20%) taxpayers.

So the pension residue will be taxed at a higher rate than the Government relief provided, and then could be subject to a further 40% (or at least 20%) when drawn down by the beneficiary. With the level SP is reaching, plus autoenrollment there will be increasingly few people able to empty even their own penion fund at a level below the PA, never mind an inherited one.

First world problem, but it means that it can't be generalised that there will be no double taxation.

squirrelpie

LHW99 said:

So there isn't double taxation, because there was 'reverse taxation' when you put the money in the pension.

There could be. For our own SIPP pensions, neither I nor OH have been more than basic rate taxpayers (except OH for a single year). Others will be the same, maybe not a majority, but a significant minority, so the tax relief will also have only been given at basic rate.

It is quite possible that a) any estate + pension residue will be liable to IHT, due to rises in property values and b) the inheritors are (40% / 20%) taxpayers.

So the pension residue will be taxed at a higher rate than the Government relief provided, and then could be subject to a further 40% (or at least 20%) when drawn down by the beneficiary. With the level SP is reaching, plus autoenrollment there will be increasingly few people able to empty even their own penion fund at a level below the PA, never mind an inherited one.

First world problem, but it means that it can't be generalised that there will be no double taxation.

You're right that the case you describe is possible of course. Equally possible, and probably more likely, is that pension contributions will have been made as 40% taxpayers and withdrawals made as 20% taxpayers. So unless you also want to completely change the system somehow, I'd still suggest it is fair.

Albermarle

LHW99 said:

So there isn't double taxation, because there was 'reverse taxation' when you put the money in the pension.

There could be. For our own SIPP pensions, neither I nor OH have been more than basic rate taxpayers (except OH for a single year). Others will be the same, maybe not a majority, but a significant minority, so the tax relief will also have only been given at basic rate.

It is quite possible that a) any estate + pension residue will be liable to IHT, due to rises in property values and b) the inheritors are (40% / 20%) taxpayers.

So the pension residue will be taxed at a higher rate than the Government relief provided, and then could be subject to a further 40% (or at least 20%) when drawn down by the beneficiary. With the level SP is reaching, plus autoenrollment there will be increasingly few people able to empty even their own penion fund at a level below the PA, never mind an inherited one.

First world problem, but it means that it can't be generalised that there will be no double taxation.

It is very unlikely that the whole unused pension pot would incur IHT at 40%. Some of your nil rate band will be assigned to it ( under the proposals).
In some cases only a very small part of the unused pot will be subject to IHT, if your estate + pension pot are only just above the nil rate bands you have available.

ader42

Firstly fairness doesn’t come in to it, the rules will be the rules.

Now personally I’m totally against these new rules (due to my personal situation) but I can’t change them.

Having said that, I would not describe it as double taxation at all in almost all scenarios. If you had tax relief on the way in of any level then the income tax on the way out balances it. I suppose you can call it double-taxation plus tax-relief if you want to be a pedant like I often am. 

The only possible exception that would result in actual double taxation would be a lack of tax-relief, so if you didn’t get tax-relief because you were paying in more than the earnings limit for example, then died after age 75 resulting in 40% IHT and the inheritee was a 45% tax payer = that would suck.

e.g. £100k paid in with no tax-relief added (maybe £20k a year over 5 years), let’s say that doubled in value to £200k, you died and the estate had 40% IHT to pay leaving £120k and the inheritee had to pay 45% tax on it (£54k) so would receive only £66k. If that initial £100k had been put into an ISA over 5 years and it had similarly doubled to £200k, it would also attract the 40% IHT (£80k) but there would be no 45% income tax to pay on it, so the inheritee would get £120k.

Yes previously it was possible to get tax relief on the way in at 40% and then withdraw it all tax-free under a combination of 25%TFC, the personal allowance, dieing before age 75 and a lack of IHT but that was potential negative taxation.

Therefore, there is usually only single taxation (IHT) and this would have been the same if the money had not been put in the pension but had been put in an ISA or even if it had been used to buy (and keep) gold coins from the royal mint. 

Inheritance tax should in my opinion be totally abolished, all it really achieves is making the most wealthy move their assets into ltd companies in an offshore trust. I’d prefer the wealth stayed in this country. 

squirrelpie

ader42 said:

Firstly fairness doesn’t come in to it, the rules will be the rules.

The rules are set by politicians, and they definitely consider abstract notions like 'fairness' when they make decisions. "Will this increase my likelihood of being re-elected, or decrease it?"

Fermion

Thanks for the various responses.
I'm afraid that in our case we will be well into IHT. 
For the final survivor, current situation is (a) property circa £900K now, (b)Savings/Investments/ISAs circa £750K, (c) Combined DC income Drawdown pensions currently £1.2M.
What I don't still quite understand still is how IHT fits in with charitable gifts. We have written in our Wills that 10% of our net estate goes to charity, thus reducing our IHT to 36%. However the question is (given the pension pot is part of the estate but also in Trust) how will the IHT component of the pension pot (paid by the PSA) also be charged at the reduced 36% rate? How will that work? Also for the pension pot, how can monies from that be paid to charities when it up to the pension trustees to pass to the  designated beneficiaries? Very confusing.

We both had planned to continue taking less than the natural DC pension yield, but if the draft consultation arrangements go ahead it would seem to make sense now to drawdown more from our pensions and maybe invest more(ie the surplus) in our stocks and share ISAs. (we currently draw the full dividend yield from our ISAs). We are both still basic rate tax payers so we have  leeway. The rationale being that although our ISAs will incur the full 40% IHT rate, at least our Children won't have to pay any further tax on that element of our estate.

I'm going to have to chat  again at some point with the Wealth Manager who helped us plan our Wills.

af1963

The interaction between pension scheme admins ( possibly several different ones) and executors (possibly inexperienced family members)  has the potential to become very complex and slow. Nothing can be finalised until the slowest pension admin has responded and the executor has combined all the responses . The details are out for consultation now.  I'd like to see something that allows pension schemes to make at least partial payouts quickly, holding back 40% in case of a tax liablilty but paying the rest up front.  ( And then later releasing whatever is not needed to pay any eventual tax bill.)

The charity gifts rules are another part that isn't yet clear.  Will it require 10% of the total *including pensions* to go to charity to qualify for the reduced rate ? Don't think we know yet. 

And as far as I know ( I'm very far from an expert in this but been looking it up online!), payments to charities from pension schemes can incur a different set of special tax charges if they are made while any "dependent" is alive. Which, if correct, complicates any wishes to leave part of the pension to charity to reduce IHT.

Plenty of details still to sort out.