Unexpectedly the UK government has decided, from 2027, to treat unused UK pension funds on death (ie funds not withdrawn from a scheme) and death in service payments as included in the deceased’s estate.That means that the unused pension funds, death in service payments etc would be liable to UK IHT, if the total estate exceeds £325,000. The only items ‘spared’ will be dependants pensions and lump sums bequeathed to charities. The change will apply to both defined contribution and defined benefit schemes.
Any IHT due will be deducted from the pension funds by the administrators of the scheme.
Obviously if the deceased has left a will transferring all the assets to their spouse on death there would be no IHT. The UK/France IHT treaty is unclear (to my mind) as to whether unused UK pension funds would be treated as being located in France (and therefore exempt from UK IHT for a long term French resident). The treaty only refers to assurance and insurance payable as being located (ie subject to tax) in the country of long term residence, but doesn’t explicitly refer to pension funds. I think it reasonable to assume that HMRC would be very reluctant to concede that a (substantial) UK pension pot was not within the change to IHT on the death of a long term French resident, so I would not rely on the treaty to escape an IHT charge! Death in service benefits would quite possibly be treated as French based for a French long term resident.
The government is consulting on this, but only in respect of the technical implementation of the measure (eg how in practice the pension administrators would obtain the necessary information to determine the IHT due).
What’s wrong with that?
Hasn’t the pension pot already had favourable tax treatment and is a vehicle to provide a regular pension income during a persons retirement.
If an unused pension has enough value to take an estate into the IHT bracket then as I see it the person with such a pot should have had the sense to use it.
There are no pockets in a sik shroud.
I don’t think anyone is saying it’s wrong (though I think that could be argued): @George1 is providing a warning for those fortunate enough to be affected.
Perhaps I should have said ‘that’s as it should be’.
My pension pot is my property portfolio so will still be there when I’m gone and should its value exceed the threshold for IHT then my estate is charged it.
I took as being informational rather than critical but I agree with your sentiment and that it should be counted for IHT, just like any other untaxed and/or unearned asset growth.
Far from ‘unexpected’, but actively speculated upon for weeks, not least because it was widely seen as unreasonable, at least in the national fiscal cirumstances.
George1 is this just for DC pensions or are they making a grab for the imputed value of DB pensions as well?
It always seemed that the interaction of DB valuations and the Liftetime Allowance (can’t remember if that’s been brought back) was a nightmare due to the high.DB values that could be calculated.l, that the person saving for a pension didn’t have much control over.
If Labour hasn’t brought back the Lifetime Allowance - which did put limitations on privileges of higher earners - and has substituted it with this then it seems most weird. As this would be a more mass attack on pension savers. As it starts a government take at a very much lower level (Inheritance Tax thresholds of ?£325 thousand) than the Lifetime Allowance which only bit at about ?£1.8 million?
In practice the proposed change is most likely to impact DC pensions. DB pensions generally lapse on the member’s death, bar any death lump sums (to be brought within the ‘new’ IHT charge) and dependents pensions (to be excluded from the ‘new’ IHT charge but taxable to income tax instead).
Labour wisely (in my view) abandoned its stated prior commitment to reintroduce the Lifetime Allowance, no doubt mindful of the likely hideous complexities involved in so doing. For example it took over 100 pages of legislation simply to abolish the LTA in 2023 and 2024 Finance Acts.
Ah yes obvous when you say it George1 - as this triggers on death you are right most DB schemes stop there so there is 0 value to be bequeathed.
Wondering if any AVC’s in a DB scheme would attract the same treatment as DC funds ie bequeathable? so taxed.
If so does it sound to you like the DB schemes will practically speaking, deduct the standard % of tax on any payout to Expression of Wish nominees? or the estate?.and leave them to claim back any overpayment of tax from HMRC.
… as with witholding of standard rate of tax, or emergency tax, on withdrawls now if the fund hss not yet got its own tax code.
Is this the removal of the under-age-75 taxfree bequeathing of pension fund, being removed?
AVC’s are held and managed within DB schemes though John. And you don’t have any ability to control them or access them without going through the DB scheme administrators.
But as they are pension assets held within a DB scheme that do have a value I am assuming they too will be subject to this tax.
Maybe it’s terminology Karan Despite my AVCs being in the DB scheme I always regarded them as separate, and of course it’s been my responsibility to manage them.
Any funds left after I pop my clogs would be taxable so that is why I’m dissipating them ASAP while taking longevity and annual TFAs into account
The government is consulting on the precise practicalities and methodologies but currently envisage an iterative series of exchanges of information between executors and pension administrators. HMRC will provide an online calculator for the executors to determine if there is IHT due on the total estate, and the calculator will apparently work out how much IHT relates to the pension benefits, including allocations of using up IHT nil rate bands. The pension administrators will then deduct what they believe is the correct amount of IHT directly, based on the calculations of the executors. Needless to say HMRC are asking whether there are any other funding models they should consider…
There won’t be any distinction between DC and DB, including AVCs - all will be swept up into the IHT net bar dependents pensions and lump sums to charities.
Yes! That’s one of the main aims, ie to tax what the government sees as an abuse of pensions, currently enabling tax free wealth transfer via legacies of pension funds to beneficiaries.
HMRC acknowledge that taxpayer behaviour - exactly as John explains - may well reduce the adverse impact of the proposed changes! In particular they cite taxpayers withdrawing their pensions and then making lifetime gifts of the cash to beneficiaries which will be IHT free if the donor survives for 7 years etc…
Despite my AVCs being in the DB scheme I always regarded them as separate, and of course it’s been my responsibility to manage them.