IHT 2027 Pension Changes: Using JLSD Term Policy vs Alternatives?

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82038875#Comment_82038875

True, but there is also estate tax to pay at lower thresholds in some US states, but in general US "death taxes" are far lower than in the UK. For Federal tax there's still the advantage of a married couple being able to pass on their individual IHT threshold to their spouse which means married couples can eventually pass on $30M before any IHT.

michaels

https://forums.moneysavingexpert.com/discussion/comment/82036326#Comment_82036326

I couldn't follow this, it seems only the portion of the DC pot claimed as inheritance tax will not then have income tax imposed rather than a specific tax credit to avoid the remainder effectively being double taxed as far as I can understand.

Eg 1m taxable DC pot, 400k iht taken leaving a 600k inherited pot still in a wrapper meaning it is subject to income tax on drawdown?

Bostonerimus1

I suppose the issue of step up basis also has to be considered with any gifting vs inheriting plan…is that right?

Dead_keen

Eg 1m taxable DC pot, 400k iht taken leaving a 600k inherited pot still in a wrapper meaning it is subject to income tax on drawdown?

Yes, if the member died after age 75.

The way I understand the income tax is to imagine a pension pot of, say, £100,000 and there being, say £30,000 of IHT due on the pension pot element. You can get a number of scenarios but the two main ones are:

1. Pension scheme administrator pays £30,000 to HMRC, £70,000 to beneficiary. If the member died:
   
   1. before age 75, no income tax.
      
   2. age 75+: income tax on £70,000 (say) £31,500 PAYE at 45% (to illustrate the worst case scenario) and £38,500 paid into their bank account. So full income tax relief for the amount of the pot used to pay IHT.
      
2. Pension scheme administrator pays £100,000 to beneficiary. If the member died:
   
   1. before age 75, no income tax. Beneficiary pays £30,000 of IHT to HMRC and so has £70,000 of cash left. No income tax relief as no income tax was paid. This is exactly the same as the first scenario.
      
   2. age 75+: £45,000 PAYE, beneficiary receives £55,000. Beneficiary pays £30,000 of IHT to HMRC and so has £25,000 of cash left. Beneficiary has a "chat" with HMRC (guidance will be published before the new rule apply about what this entails) and will get a refund of income tax that would have been due on the part of the benefit used to pay the £30,000. With my made up 45% income tax example that is £30,000 x 45%, £13,500. When the income tax is repaid, the beneficiary is left with £38,500. This is again exactly the same scenario - albeit there will be a delay and some process for the beneficiary to get the tax refund.

Yorkie1

The IHT/Income tax situation seems to be evolving. One aspect of the IHT allowances that I find a bit unfair is that if you don't have any children to leave money to you lose the IHT free housing amounts and if you are single you don't get the spousal advantages either.

Well yes, indeed. My house value is likely to exceed the IHT allowance on its own. I have built up savings as there's nobody else to rely upon to share living expenses and to fund any care costs. No spouse or children, only a niece in Europe and two god children in England.

While I do slightly resent that my estate will pay wodges of IHT, I intend to make sufficient charity gifts to reduce the % (assuming current rules apply), and I won't be around to see the 36% tax deduction. My beneficiaries will I'm sure be grateful for anything they receive.