Update on IHT and pensions

Despite the comments and concerns raised in the over 600 responses the government received they have not proposed any concessions form the announcement in the Autumn 2024 budget.  

For anyone dying after 6th April 2024, when calculating whether or not IHT is payable on an estate the personal representatives will need to include the value of any pension provision that passed to another following their death. This will include and mainly affect those with personal pension plans including, those auto-enrolled into their employers’ schemes, where the person dies not having converted the whole plan to provide an annuity or monthly or annual pension.

The value of a pension will also be included when calculating whether or not an estate is entitled to the additional Residential Nil Rate Band. This relief, worth up to £175,000, is available if the person died leaving an estate which included their house to their children or grandchildren. The allowance is only available in full if the estate is worth less than £2million; above this threshold the allowance reduces until it disappears completely when the estate reaches a value of £2.35million.

The only exceptions are:

1. Any pension benefits or scheme that pass to the surviving spouse or civil partner,
2. Any death in service benefits where person died before pension age (usually found in defined benefit schemes);
3. Any widow’s or dependent’s pensions payable under a defined benefit scheme (sometime called final salary or career average schemes). This includes pensions payable to non -married cohabitees and pensions paid to children under the age of 18 or attending post 18 full time education.  

Procedure

The government have listened to the concerns raised over how the scheme will operate. The personal representative of the deceased will now be responsible for collecting the information and declaring it to HMRC and organising payment of any IHT due. The pension companies must provide the personal representatives with full details of the value of any undrawn pension benefits at the time of death, all benefits payable under the scheme to any beneficiary or nominated person and their details.  A new updated pension form will be produced to enable the personal representatives to report the required information for each pension scheme of which the deceased was a member.

It will now be up to the personal representatives to decide (following discussion with beneficiaries of the estate and the persons receiving the ongoing pension benefits or to whom the scheme is transferred to) which assets they use to pay the total IHT bill. The personal representatives could therefore decide to pay all the IHT from other assets, such as proceeds of sale of the deceased’s property, rather than pay part of the tax due from each pension scheme pro-rata. This may cause difficulties for the personal representatives when dealing with the beneficiaries where the pension benefits pass to different people to those who inherit the rest of the estate under the deceased’s Will or under the laws of intestacy.

There will be a scheme similar to that which exists with the banks to enable the personal representatives to arrange for the pension scheme to pay direct to HMRC the tax without having to wait the issue of the grant of probate. 

Income Tax on recipients of the pension scheme.

The government have confirmed that, where the person was aged over 75 at the time of their death and irrespective of whether Inheritance Tax was payable due to the value of the unused pension, the recipient of that scheme will be liable for income tax at their marginal rate on any payments received whether they decide to convert the pension into an annuity or take any income via drawdown. This will mean that a pension scheme on which IHT was paid will, in effect, be taxed at a combined rate of between 65% or 85% depending on the recipient’s tax position. 

If the deceased was under 75 at time of death, then the benefits can be taken by the recipient without them being liable to income tax on the payments. 

If you wish to discuss how the proposed changes in 2027 will affect you personally and what estate planning opportunities maybe available to you please contact our Private Client Team to arrange a meeting.