Inherited Annuity

Blythe15

My father passed last year and part of his estate was an annuity which was surrendered as part of his estate.  I received part of this as per his Will and was subjected to 33% tax.  Recently I received a letter from HMRC whereupon the amount of the payout from the annuity has been added onto my annual income and tipped me over the £100k threshold and i've been hammered for Tax with another bill.   Should this be the case as this is inheritance not earned income? Any advice would be appreciated I did speak to HMRC and they advised me to speak to the Annuity company but we had numerous issues with them dealing with his estate. 

Marcon

How old was your father when he died? 

Blythe15

He was over 75yrs 

Keep_pedalling

What sort of annuity was this? As it was in his will it does not sound like a normal pension annuity which usually leave nothing after your death and would not form part of your heritable estate. On the other hand if it was part of the estate the only tax a[plying to it would be IHT.

xylophone

He was over 75yrs 

https://www.gov.uk/tax-on-pension-death-benefits

Annuity or money from a drawdown fund	Defined contribution	75 or over	Income Tax deducted by the provider

The amount  deducted may or may not have been correct depending on your individual circumstances.

Marcon

Blythe15 said:

He was over 75yrs 

Then income tax would be payable if this was an annuity bought with money direct from a pension scheme.

dunstonh

My father passed last year and part of his estate was an annuity which was surrendered as part of his estate. 

There is a lot of confusion on what has happened as what you describe is not what usually happens.  This could be terminology that we need to clear up.  It could be a mistake on how the person dealing with it requested it to be paid.   Or on the type of annuity or whether it was even an annuity.

So, lets start with some questions:

1. Was it really an annuity?   (Annuities cannot be surrendered, although some will have death benefits attached to them - the most common is continuing income but lump sum can be available in a minority of cases)
2. If it was an annuity then was it a lifetime annuity (pension), fixed term annuity (pension) or a purchased life annuity (not pension)?
3. How much was the death benefit (lump sum death benefit allowance  - LSDBA - could have been exceeded, and the tax could be that rather than inheritance tax)
4. was the option to have it paid as an inherited pension investigated before being paid (often the best way for beneficiaries who are higher-rate taxpayers or above)

IHT is not charged on pensions or pension annuities (in 99.9% of cases).   This is what is making me lean towards LSDBA above being the potential initial tax hit.

Should this be the case as this is inheritance not earned income?

It is income if you have selected to have the pension death benefits paid out as a lump sum instead of being retained in the pension wrapper (i.e. kept as a beneficiary pension to access later when more tax advantageous to do so)

Any advice would be appreciated I did speak to HMRC and they advised me to speak to the Annuity company but we had numerous issues with them dealing with his estate. 

Pension annuities do not form part of the estate.  So, that could be behind your issues if the executor is asking estate questions to the annuity provider.

Blythe15

Thanks everyone I've now gone to a Tax Advisor - yes it was a pension annuity which paid out on the passing - the money has been paid out but HMRC are trying to charge more tax when its already been deducted at source 

DRS1

Sadly what is deducted at source is not always the total tax due.

You mention 33% tax deducted (an odd rate) but then say you are over the £100k income mark which as you probably know gets you into 60% territory.  Hopefully the Tax Advisor can suggest ways to mitigate that (a pension contribution perhaps).

xylophone

HMRC are trying to charge more tax when its already been deducted at source 

But the deduction at source may or may not be correct.

For some people it may be too little.

For others it may be too much.

It will depend on the individual's situation as regards tax.

DullGreyGuy

Blythe15 said:

Thanks everyone I've now gone to a Tax Advisor - yes it was a pension annuity which paid out on the passing - the money has been paid out but HMRC are trying to charge more tax when its already been deducted at source 

You still need to clarify what you mean "paid out"? 

Was it just a death benefit? That would normally be £1,000 and intended to be towards funeral expenses etc but can be used however
Did it have a guarantee period and that was still in force?
Presumably the annuity was in payment prior to his passing or was it deferred?