Potential rowback on tax on inherited SIPPs

aroominyork

From the Telegraph yesterday, Mike Warbuton on "It's finaly becoming clear how the new pension death tax could work":

Very recently included in the Finance Bill is a clause which amends the current income tax rules to give relief to beneficiaries of a pension fund which has been caught for inheritance tax.

The wording is convoluted, as is often the case, but on my reading of the new clause I believe that when income is paid by the fund to a beneficiary they will be given a deduction equivalent to the inheritance tax paid by the pension fund up to the amount of the payment.

To take a simple example, suppose your pension fund at the second death of you and your wife is £100,000. If the inheritance tax due on the fund is £40,000, there will then be £60,000 left to be paid out as a pension to the beneficiaries, potentially subject to income tax.

However, when this £60,000 is paid out, the first £40,000 of the payment will be given a deduction equivalent to the £40,000 paid as IHT, therefore leaving only the remaining £20,000 subject to income tax.

Accordingly, a basic rate beneficiary will pay income tax of £4,000 on this £20,000, giving an overall effective rate of 44pc. On the same basis, a higher rate beneficiary will pay an effective rate of 48pc and an additional rate beneficiary an effective rate of 49pc.

Albermarle

Would seem to be a sensible evolution of the rules for the 'New Pension Death Tax' (as the Daily Mailograph calls it)

aroominyork

My starting expectation is that IHT will be top sliced evenly across all assets. Example: estate of £2m including £500k SIPPs. 2 x NRB+RNRB means £1m is taxable at 40% = £400k IHT. Assume 25%/£100k of the tax due is applied to the SIPP. That means £400k SIPP is inherited and £300k of it is taxed as income on withdrawal. That seems more realistic than the Telegraph's example where every penny of the SIPP is taxed for IHT.