Q&A
Last Updated: 23 Jan 25 10 min read
The M&G Technical Team held an online event covering pensiosn death and taxation. The event questions and answers are below.
Do we know for certain if current Beneficiary Drawdown pots will remain free from IHT post April 2027? Or is the 'true detail' to be revealed soon. Thanks 😊
As successors benefits are listed as death benefit types impacted we can only assume the intent is they will be in the estate of the beneficiary when they die.
Do you have any thoughts as to why this is coming in from April 2027, arther than sooner?
Mainly because it requires HMRCs new digital IHT system to be operational and also constant industry request not to implement things too quickly.
Do you think we will see a difference in tax between pension benefits taken as a lump sum and funds left in a pension? Thinking double taxation on the lump sum.
You can never say never but it doesn’t appear that that will make a difference.
If a pension plan is held in trust, is it not outside the the persons estate for IHT?
Currently, with discretionary disposal, but not from April 2027.
Will Group Life Benefits paid out under a Trust be treated as pension funds and therefore taxable for IHT?
The consultation suggest these are to be exempt. We await clarity.
What about the possibility of moving back to a pre-2015 55% flat charge on all pensions to fit the bill?
That would certainly solve most issues with the proposals. There appears to be a lot of support for a flat charge.
When will the "scope" be announced by the government as there are a lot of "what ifs" and no substance/detail as to what is included by the government?
As per pensions scheme newsletter 166 "later in the year"
Please define Unused Funds?
That's the $64,000 and requires scope to be explained.
Will pension funds be included in the calc for Residential Nil Rate Band Taper? If so, not just increasing taxation on the pension but the wider estate too?
That is our understanding yes.
Hello, please can you confirm... is it anticipated spouses pensions on death from DB schemes won't be subject to IHT. Lump sums could be? Thanks
We believe any death benefit of any type going to a spouse/civil partner will be exempt.
Post April 2027 will pensions benefit from any Nil Rate Bands?
The proposal is they will share NRB with the non pension estate in proportion to the taxable values.
So to confirm, post April 2027, the pension pot will form part of the estate and if total estate value is more than £2m the Residence NRB is in danger?
Yes.
Holy poop- what a tangled web! Do you think that the Treasury actually modelled the decisions people would take to try and mitigate IHT post April 2027?
Haven’t a clue!
Calculating IHT on estate moving fwd for those with pension >£325,000 will it be the case that NRB always applies to pension assets in order of applying the NRB?
The proposal is they will share NRB with the non pension estate in proportion to the taxable values.
Is there any hope that instigating drawdown pots will be exempt rather than compelled to buy an annuity then gifts out of income??
Nope!
Will current Beneficiary Drawdown pensions remain outside the new regime?
Nope they are in as successors benefits have been identified as in scope.
Presumably on the SSAS question the SSAS can insure members lives and use the payout to protect the property?
Presumably, but best ask a SSAS expert.
Do you foresee a change of government reversing the rules?
You can never say never but no. We believe the fiscal reality facing all parties is that there needs to be more tax collected from wealth as opposed to income.
Are unused pensions inherited by a spouse expected to suffer IHT or will spousal exemption apply and this is only an intergenerational tax on 2nd death?
It is expected death benefits to spouse will be IHT exempt just like any other asset that goes to a spouse (assuming they are long term resident/domiciled in UK).
If a widowed client buys a level £20k annuity aged 75 with a 10 yr guarantee & dies aged 82, do children pay inc tax and IHT on the annuity payment for 3 years?
The balance of the guarantee will have a probate value added to the estate. Continuing income payments will be taxed. We assume the IHT will be a liability of the estate as it is now but we're TBC.
Can you confirm the PCLS is counted as income and a regular gift of PCLS would qualify as excess income?
We believe that is the rule and Abrdn Techzone says they have had the same confirmed by HMRC.
Married couple. Upon 1st death pensions are passed to children as per EOW. Would this constitute use of the deceased's' NRB from Apr 27 onwards (with IHT if >)
Yes it would.
What about SSAS's? If the older parents are in a SSAS can non earmarked pensions are switched to children if we then have them join the SSAS?
That doesn’t change the IHT position whether they get it from the scheme or they get it by being in the scheme.
If you gift a property to your child, but live in it and pay them rent for 7 years. If you stop paying rent after the 7 years, is it back in your estate?
If most cases yes, you've reserved a benefit from the gift, however there are a couple of exceptions.
Will AIM Shares use within SIPP / SSAS be reduce the impact of IHT on death?
We believe this will require a change to legislation (and be very complicated if it is if there are non pension relievable assets)
If the pension fund is invested in unlisted shares on death and meets all the criteria, do you think Business Relief will be available? I can't see why not
We believe this will require a change to legislation (and be very complicated if it is if there are non pension relievable assets)
Is there any suggestion that BR schemes can be included within pension?
That is TBC we think it will require legislation and will be really complex if it has to interact with non pension business relief assets.
If PCLS is income (per abrdn) - can a client draw max-PCLS (say £260k) and gift as a normal expenditure out of income with immediate full IHT exemption?!?
It would need phased out and regularly gifted. If just taken out and gifted it wouldn’t be normal it would be one-off. If taken out in one go then gifting was phased this would have the issue of the income becoming capital.
Surplus Income - does it prevent clients using capital for holidays etc e.g., lots of savings but cannot ever enjoy it as they'll be resorting to capital?
If clients need capital for their normal expenditure then they have no surplus to gift.
Where a PCLS lump sum is paid out, can this be given away as a gifted away and becomes immediately exempt?
It would need phased out and regularly gifted. If just taken out and gifted it wouldn’t be normal it would be one-off. If taken out in one go then gifting was phased this would have the issue of the income becoming capital.
Does annuity income count as exempt excess out of normal income, like drawdown income seems to?
Yes, pension annuity income. Purchase Life Annuities it’s just the income amount.
Would funding a life policy premium from a pension in drawdown be considered gifting out of regular income by HMRC?
Assuming it was in trust then yes.
If you gift the PCLS away immediately does that count as a gift out of surplus income?
No a pattern of gifting of at least 3 to 4 years needs to be established - the longer the better, but once you hit 7 years the exemption no longer matters.
Are large irregular bonuses (£30-40k pa) not needed to cover regular outgoings and transferred directly to children count as a gift out of regular expenditure?
It appears the bonus is received annually but is of irregular amounts. In that case, subject to the other conditions being met, we believe it would be exempt as the amount of the expenditure need not be fixed. It is sufficient that a "formula" has been adopted by application of which the payment (which may fluctuate) can be quantified e.g. document an intention to gift whatever you have left of your annual bonus or whatever your surplus bonus etc.
Do we need to be thinking about the order in which a client draws an income from various assets? previously pensions would always be draw on last as IHT efficient
Yes, it will be a fairly comlex decision as there are many moving parts.
What options should clients who have inherited pension pots where the deceased died before 75 consider before April 2027?
If it is just going to be subject to IHT post they should consider removing it from the pension and using gift/trust/business relief based on individual circumstances. They may also consider a nomination to go to a non exempt beneficiary, whether continuing in pension or not (or a bypass trust). Different people, different circumstances, different answers!
Bypass Trust - how does the tax charge on payment to Trust i.e., > old LTA where death is pre 75) and post 75, affect the views presented?
It doesn’t. When you decide to go that route you will take the charge into account like you would do now when considering a bypass trust. Remember the trustes pass on a 45% tax credit.
What about taking taxed pension and using gifts out of normal expenditure to place a lump sum every year into an offshore bond?
That could work in the right circumstances.
If Pension Beny is only 20/25 would you leave in Pension or move if estate is above NRB?
Depends if the beny is spouse or not. Bit specific.
When drawing down pension assets to mitigate tax for bene. Surely this only relates to tax free benefits or when the bene has a higher tax rate than client?
Yes. That's what we were saying we hope!
For co-habiting couples who thought they were outside the IHT scope now we should be recommending that assets are left to children, or just get married!
That's an entirely client specific answer!
Is it better to consider spousal tfrs as defer IHT rather than IHT free and could be chargeable upon 2nd death if value above 2x NRB/MRNRB etc
That will be individual specific based on circumstances.
Would a 45% tax charge be applied to any lump sum death benefits paid to a bypass trust if death is after 75?
The post IHT funds will go through the pension tax system as they currently do so yes.
Bond withdrawals after the 20 years has apssed and liable to income tax. Do they count as capital withdrawals still or income.?
Still capital
Death after 75 pension pot going into a Trust estate suffers IHT, pot will be virtually wiped out. Beneficiary lower tax payer, can they reclaim from HMRC?
They can only reclaim based on the 45% tax credit not the IHT
Pension lump sums paid to a bypass trust will suffer a 45% tax charge if the pension scheme member dies after age 75 - is this still correct?
Yes, but it will be on the post IHT amount
Will a Bypass trust prevent estate from rising above £2m and loss of RNRB?
A bypass trust is not in your estate for RNRB purposes
So, what is the next step from here ? Will subsequent (hopefully) Techy Thursday's cover and delve into further detail and planning options for the red money ?
Yes, as and when there's something you need to know / consider we'll work out how to tell you.
Is it a likely a future change in Government could reverse these changes and we revert back to where we are at present?
That's not a technical matter. We believe the fiscal reality facing all parties is that there needs to be more tax collected from wealth as opposed to income so we'd not be hoping for that to come to fruition.
You previously run PTS specific week-long CPD webinars in the past, any plans to do the same in 2025?
Did we? Don’t remember them. But, no plans.
What would Gary, Tank Commander, do? 😉
Seek a recommendation for a good financial adviser.
Do you think that disctetionary death benefits and expression of wish will move to binding nomination from April 2027 as pension fund will be in estate anyway?
That will be down to individual schemes but not necessarily so. There could be issues with binding nominations as we know nominations are not always kept up to date when circumstances change.
Will pensions not be available until proof of Probate is sent to the pension provider which could delay access?
I think it will be scheme speciifc what they choose to do but suspect most schemes will pay at least 60 % out then may wait for conformation of LPRs to decide what IHT to pay.
Please can you send a link for that LSA/LSDBA modeller as it looked like a useful tool?
It's here.
How do you envisage the likes of SASS's having to pay IHT and the challenges there may be if there is a commercial property in the SASS?
Yes, there will be issues with illiquid assets. Issues they have had before, but probably best asking them.
Can you comment on the Special Lump Sum Death Benefits Charge?
It will be payable as normal if appropropriate based on the post IHT funds distributed.
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