Is your pension subject to Inheritance Tax and any other taxes when you die?

Jun 20, 2018 | Tony Byrne's View

Since Pensions Freedoms were introduced by the then Chancellor George Osbourne in April 2015 the common belief has been that Money purchase pensions are free of Inheritance Tax on death.

When an individual is in serious ill health and unlikely to live long enough to draw benefits there will be an actuarial measurable loss to the estate and this could result in a transfer of value for Inheritance Tax purposes under IHTA 1984, s 3(1).

To help taxpayers, HMRC adopts a rule of thumb for these purposes. A transfer of value will be treated as possibly arising only if the individual makes the transfer when they are in serious ill health and die within two years. In such circumstances, a return will need to be made in boxes 17 to 21 of form IHT409. This is the pension supplement to the IHT400 – the Inheritance Tax return on death.

There are certain other money purchase pension schemes which are subject to Inheritance Tax on death namely retirement annuity contracts and Section 32 Buyout Bonds. The reason for this is because such pensions are not held within a pension trust. This means that in order to avoid being subject to Inheritance Tax on death such pensions need to be written into private trusts by the policyholders.

Prior to April 2015 only money purchase pensions suffered a 55% Income Tax charge on death post age 75. At one stage these pensions also suffered an IHT charge after age 75 which meant that the combined tax charges were a whopping 82%!

Things have now improved substantially. There is no longer an IHT charge on death after age 75. There is no Income Tax chargeable on the pension scheme post 75 either. If the plan holder dies before age 75 there is no taxation payable on the pension. If he dies post 75 again he pays no Income Tax but his beneficiaries will pay Income Tax at their highest marginal rates on any withdrawals they make from their pensions.

So the tax regime on death has improved substantially especially since April 2015 and the introduction of Pension Freedoms.

If you are looking for advice on how to minimise the effects of taxation on your money purchase pensions do contact us for a consultation. You know it makes sense.

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