Heirs' income tax on inherited SIPPs

aroominyork

DRS1: Well as @Dead_keen points out if the estate (or beneficiary) pays the SIPP related IHT out of other assets then the SIPP is left at £1million and when the beneficiary draws money out of that £1million IT will be payable…

vs.

SnowMan: In the scenario that no IHT is paid from the pension and it is paid from the free estate, then for a post age 75 death a percentage, for example 10%, of each withdrawal will be income tax free to avoid IHT being paid on the inheritance tax amount itself.

My guess is SnowMan is correct, simply because that would be the just outcome.

Dead_keen

https://forums.moneysavingexpert.com/discussion/comment/82130476#Comment_82130476

There is no versus.

Mine was the original position based on the consultation. That is no longer the case as the government appears to think that a 91.3% marginal combined tax rate in some edge cases was a bit too high.

I have no idea if the end position will be as Snowman suggests. I personally doubt that will be the mechanics of the beneficiary getting income tax relief (in the very rare situation) where the scheme does not pay the IHT. My guess is that in practice there will be several ways that the beneficiary gets the income tax relief. An obvious one is a tax refund via self assessment. The other is via a tax code big enough to give a large enough tax free amount. Only operating PAYE on a percentage is cumbersome for payroll, defers the income tax relief and gives the wrong tax relief (other than by fluke).

Oh, and the government says:

Beneficiaries will need to work with HMRC to resolve their Income Tax position. Further guidance will be published in due course.

aroominyork

Beneficiaries will need to work with HMRC to resolve their Income Tax position.

I noticed that and interpreted it as Treasury civil servants saying "we're not paid enough to sort out this !!!!!! while our mates from DHSC are already down the Nag's Head."

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82130476#Comment_82130476

A bit of selective quoting going on there

SnowMan

https://forums.moneysavingexpert.com/discussion/comment/82130530#Comment_82130530

I think we have to wait for the technical note to see if in the scenario the IHT is paid from the free estate income tax will operate in the way I envisaged or whether a separate tax reclaim is needed. I accept you could turn out to be right. If I was arguing against myself I would say the scheme needs to know an accurate % that isn't taxable in order to exempt that portion and HMRC would be wary of the executor telling the scheme what that percentage was. I would see that as the major potential issue. In terms of the timescale it says in the second technical note

autumn 2026: technical note 3 which is expected to cover international issues, the interaction of Inheritance Tax with income tax, further guidance on intestacy, and clarification of matters relating to charities and trusts, among other topics

A practical issue is also that it may not be possible for the scheme to pay the inheritance tax from the inherited pension even if that is what the executor and beneficiaries want, as for this to happen the inheritance tax deduction has to be at least £1,000 (technical note 2: para 8.2)

The pensions direct payment scheme may only be used where the Inheritance Tax (and interest) liability being paid is at least £1,000. A payment notice for a lower amount will be invalid. Where the amount due is less than £1,000, the personal representative or beneficiary must make the payment directly to HMRC through other sources. To be valid, there must be sufficient funds left within the scheme as set out earlier in section 7.7.