Following the Autumn Budget 2024, the Government finally published its long awaited draft legislation for the treatment of inheritance tax on unused pension funds and death benefits which will come into effect in April 2027. The draft rules include:

From April 2027, unused pension funds and pension death benefits will be included in the member’s estate on their death regardless of whether the scheme trustees have discretion over the payment of any death benefits.  The exemption for death benefits passing to a spouse or civil partner or to registered charities remains.  The following pension funds and death benefits are also excluded:

• All death in service benefits payable (whether from a discretionary or non discretionary scheme)
• Dependant’s scheme pensions from defined benefits schemes/collective money purchase schemes;
• Small scheme pensions commuted to a lump sum;
• Dependent/beneficiary annuity payments;*
• Business and agricultural assets held in pensions will not qualify for Business Relief or Agricultural Relief;

*Guarantee payments and value protection paid during an annuity guaranteed period, will be included in an estate.

Following the consultation around reporting and paying of inheritance tax relating to pension funds, it was confirmed that it will be the responsibility of the personal representatives rather than the scheme administrators, to report and pay any IHT due.  They will need to work together with pension scheme administrators to obtain the information needed and to calculate the amount of tax that relates to each pension scheme. Further guidance has also been provided by HMRC to personal representatives, scheme administrators and beneficiaries around how and when to pay the tax.

There are three options for the tax to be paid:

• The whole of the IHT liability can be paid from the free estate, if there are sufficient funds;
• The pension beneficiaries can instruct the pension scheme administrator to pay the tax directly to HMRC;
• The pension beneficiaries can take their share of the pension fund in full and pay the tax directly to HMRC. This option would see the fund subject to income tax on withdrawal so the beneficiary would then have to claim a refund from HMRC in relation to the income tax paid on the portion relating to the IHT.

The draft legislation has been published for technical consultation which ends on 15^th September.  Whilst still in draft, it is helpful to have some clarity on the practical aspects of the new rules as we now get used to a very different pensions landscape.

Retirement income planning and inheritance tax are still inextricably linked, only now the options to reduce the potential tax charge are very different.

Considerations around affordability to make gifts and transfer assets to the next generation are now being discussed with our clients along with the option of taking life insurance to provide a lump sum to pay towards the tax charge.  There are many options still available to plan for the changes and investors that are keen to understand firstly how the rules will affect them and also how to plan for this, should seek regulated advice sooner rather than later.

Contact us on 0330 320 9280, email: info@cravenstreetwealth.com or complete our online enquiry form to discuss how government policy could impact your financial plans.

 

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice. References to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of publication. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments. You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.

Craven Street Financial Planning Limited is authorised and regulated by the Financial Conduct Authority (FCA). The FCA does not regulate tax advice.