Pondering planning with pensions in the IHT world - Q&A

Q: I have heard suggestions that Business Relief Products could potentially be bought within a pension.  Has this been discussed at a higher level?

A: Business Relief qualifying assets could be bought in a pension but the new rules make clear that the IHT relief would not be available.

Q: Why is it that Pensions will not benefit from BPR relief from AIM investments?

A: The law says so, and if you remember the policy intent is for pensions NOT to be used for intergenerational wealth transfer so allowing busines relief would be counterintuitive.

Q: Thoughts on the reduction of IHT rate from 40% to 36% for gifting 10% of estate to charity, will this now mean you also need to include 10% of pension? 

A: This is one of the points of detail we have yet to get. The charity reduction is fairly complex.  The 10% rule applies to each component of an estate individually but each component can be merged - we do not know whether pensions will fall into an existing component or have its own component.  It wil. be possible, we just don't know how.

Q: Is the NRB likely to apportioned between estate value and pension value

A: That was the original proposal. As pensions are just dropping into the estate we assume the normal rules i.e. splitting of the liability applies. Mathematically that will get you to broadly the same place though.

Q: Does the value of the pension on death add to the value of the estate where it may reduce the RNRB if the estate over £2m when incl the pension death benefit?

A: Yes, this will be deemed to be in the estate value for the calculation of the residence nil rate band taper.

Q: Also, if IHT is paid on the pension fund, do the beneficiaries of the pension still need to pay income tax on any withdrawals if after the age of 75?

A: Yes, the taxation of pension income for beneficiaries will remain as is. For death after 75, beneficiaries pay income tax on beneficiaries benefits at their marginal rate of tax.

Q: How much of the IHT bill on the overall estate and pension will be allowed to be paid from the pension assets? Is it limited in anyway?

A: Each scheme can only pay up to the pensions share of the IHT bill. You can't use a pension to pay the whole IHT bill. So as a maximum a scheme can only pay 40% of the death benefit value, and that would require the deceased to have no nil rate band on death.

Q: Where are we with unused pension funds under 55 (57 from 2028)? As I understand it the funds are within the scope of IHT wef April 2027.

A: You understand correctly, all pension that are in scope will be subject to IHT no matter the age of the deceased. IHT applies to all ages, not just the over 55's/57's.  Curretnly if someone dies pre 55 with a non IHT friendly pension it is in their estate - that's always been the rule.

Q: If unauthorised payments are not in IHT if you have high rate tax dependents it looks cheaper to take an unauthorised payment - is that a potential option?

A: Unauthorised payments are in scope.

Q: Calculation of "Probate Value" of Final Salary Pensions on first and second death post April 2027 assessment?

A: Dependants scheme pensions are out of scope for IHT. The pension would cease on second death, meaning there is no value. The only thing that may be in scope is if there is a guarantee period on the income, but that has always been in scope for IHT. The probate value for lump sums in scope will be the value as at date of death.

Q: Under LTR what if someone who has been overseas with a QROPS returns to the UK re: IHT if the money is offshore and outside the 10 year HMRC reporting period? 

A: Bit niche here and outside our area of expertise but if the person is now LTR and subject the IHT the QROPS should be in scope.

Q: Come 2027 when pensions fall into estates, has it been confirmed if the pre and post 75 rules on pensions will remain on top of IHT?

A: Yes, normal pension tax rules will apply to the net of IHT benefits.

Q: What would be classed as a lump sum that can be inherited on  pension on death pre 75 post April 2027, without  income tax being due v inheriting as income

A: All pension death benefits pre 75 have no income tax due (if set up within the 2 year period and within the LSDBA) other than dependants scheme pensions.

Q: Are QROPS covered by the IHT changes?

A: Yes, QROPS are in scope of the changes.

Q: Normal Expenditure out of Income: If premiums are paid regularly from income without affecting lifestyle, they may be exempt and not classed as PETs?

A: Correct. If the normal expenditure out of income exemptions are met, the premium will not be a PET or CLT if the policy is held in a bare or discretionary trust respectively.

Q: If using the Gifts from Normal expenditure exemption becomes increasing popular, do you think it will be removed?

A: It could be.  The gifting rules are fairly out of date and complicated so a simplification of them might not be a bad thing.

Q: What would happen if gifting out of income and client would need nursing home costs?

A: In this scenario it would be hard to argue that the gift doesn't affect your lifestyle if the money is really needed to pay for your own care. It would also no longer be surplus.

Q: would taking money from the pension over and above exp. to pay for a WOL plan count as gifting out of income. will there be limits on this for things like PET?

A: As long as you are covering your normal expenditure with actual income (i.e. not capital) then any excess can be gifted. There may be changes to this if it's used a lot (or aggressively) but time will tell on that.

Q: Do WOL Protection premiums count as gifts for IHT? If so do regular gifts out of excess income solve it?

A: Yes, paying the premiums could be a PET or CLT depending on if you put the WOL into an absolute or discretionary trust. Also bear in mind that about 1% of the average IHT bill is from life cover not in trust (in these cases the premiums would not be subject to IHT as the cover has paid to the estate). If you have genuine excess income then the normal expenditure out of income rules could apply.

Q: Do the payments for a WOL policy in trust not count as gifts out of regular income?

A: Not by default. If the conditions for meeting the normal expenditure out of income exemption are met then yes, otherwise the premiums (if not covered by another exemption, would be a PET or CLT if the policy is held in a bare or discretionary trust respectively.

Q: Does it matter what they use to pay the premiums for WOL?  ISA/Pension drawdown Vs excess 'income'.  We have a client wanting to use ISA withdrawal for this?

A: Pension income and the income from Inc class shares held in an ISA is included as income when calculating net income for the purpose of this exemption. Only that part of the withdrawal that was income could be used for the exemption.

Q: How are premiums for WOL (gifts out of expenses) into trust covered if on death of first spouse they no longer qualify under this exemption? Do they become CLT?

A: If the survivor is unable to fund the premiums under the normal expenditure out of income exemption, the premium will be a PET or CLT if the policy is held in a bare or discretionary trust respectively, unless it can be covered by the annual exemption (currently £3k).

Q: Gifts from Income - .gov states 'monthly', is this accurate and as such rules out annual pension lumps sums to gift for regular income?

A: There is no requirement for gifts to be monthly, only regular/normal.  The gov.uk website pages written for the general public should not be relied on as fact. We think the HMRC manuals are a more appropriate source of information for those involved in technical matters like financial advice.  See here https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14243

Q: Gifting from drawdown - inc tax free cash , so minimum term to strip out the full pension is 4 years ?? normally ? ( not holding you to it)?

A: HMRC guidance states that if a pattern of gifting of 3 to 4 years is seen then you should accept that gifting has been normal. https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14242

Q: RE: income vs capital debate from drawdown, is it possible the government will view any withdrawals within GAD guidelines as income and anything above capital?

A: They may well do but who knows!

Q: If a client gifts income from a lifetime annuity and dies after 2.5 years, will the income return to the estate within the 3/4 year horizon. If so, do we accept there is always an inherent risk about advising an annuity purchase for a client solely for IHT planning?

A: Not if it is accepted for the NEOOI exemption. We think there is always an inherent risk in using the NEOOI exemption as you do not know if it qualifies until you die and HMRC assess your exemption claim.

Q: With regard to NEOOI, how would Purchase Life Annuities be considered? Return of capital or 'income'?

A: Part income / part capital.

Q: can you draw income from an ISA to fund a WOL?

A: Yes, but only the interest or dividends accrued in the current or previous year might qualify as NEOOI.

Q: I heard dividend income from isas can constitute as income for gifting under NEOOI?

A: Yes, if withdrawn it would qualify as income.

Q: Please explain the annuity position where guarantee period purchased as part of annuity,  include from drawdown pot?

A: Any outstanding guarantee payments will form part of the estate regardless of whether the annuity was purchased form drawdown or not. Remember beneficiary annuities cannot be guaranteed or provide for any payments on the death of the annuitant.

Q: Sorry if you mentioned it but why is the probate value for the annuity different to the G'tee payments still to be made?

A: The probate value is the present value of the future payments. £10,000 a year remaining to be paid for 10 years is not worth £100,000 today.

Q: Is a problem with using a standard annuity to fund WOL cover? Is it old style back 2 back plans (which I think no longer exist) that are a problem?

A: Back to back plans were abusive as the annuity and protection cover were connected and not set up on standard arms length commercial terms.  In principle if the annuity and the WOL are set up on standard arms length unconnected terms then there should be no issue. But that's just our view.

Q: If the IHT on an outstanding guarantee period under an annuity cannot be paid by non pension fund assets how is the IHT paid?

A: We have no practical experience but assume it can be paid from the non annuity assets which is broadly in line with what HMRC have said in that most estates have sufficient assets to settle IHT liabilities.

Q: If someone is receiving an annuity is the only iht implication if there’s capital protection built in?

A: There will be a transfer of value whan a joint life annuity is purchased as you are reducing the value of your estate. There is a two year reporting requirement on this. If the annuity is single or joint life (with no "add ons" then this will not be in scope for IHT (assuming no transfer of value). Value protection and guarantee periods with no discretion on the beneficiaries have always been in scope for IHT, this will continue to be the case and discretionary value protection and guarantee periods will also be in scope from 2027.

Q: How do Prudential expect dependents' pension under annuity arrangements will be treated for IHT and what will the definition of a dependent be?

A: Joint life annuities are out of scope. Joint life beneficiaries from annuities have not required dependance or financial interdependence since 2015. Anybody can be a joint life, obviously if you add a grandchild as a joint life (as an example) then it's likely to be a much lower annuity rate as they will be expected to live for a long time.

Q: Can you reconfirm purchasing an annuity to fund a WOL plan again please I missed that?

A: You can annuitise your pension and get £x amount of income. You can then use that £x amount of income to purchase a WOL policy. 

Q: FIC more common now? Certainly more people asking about them?

A: We've not seen an uptick in questions about those but we are in an era of rising IHT receipts so everyone who has a solution that meets the reduction in IHT need is obviously out talking about things more now, so wouldn't be surprising if there aren't more enquiries on every IHT solution.

Q: How do we feel about starting to draw taxable income on pensions and gift 'surplus income' BEFORE April 2027, to get a head start on reducing the values?

A: That's an advice decision. It will need to be discussed thoroughly with your client. A head start can be useful on this, but what if the client gets hit by a bus prior to 2027? You have then made the beneficiaries poorer. Careful consideration on each case will be required, and you'll probably need to check with your compliance team if they are comfortable doing this.

Q: The maybe money on pension cont. What level into pension is maybe money? Run forecast for needs, its £400k, give plan for leeway in the plan £500k?

A: It will be dependant on the clients circumstances, expected expenditure, life expectancy, investment returns, all with stress testing too. There is no magic number and will depend on a lot of variables.

Q: Business Relief: how do you compliantly reconcile recommending a full equity solution with the infrequency of clients' natural ATR profiles being so aggressive?

A: We don't think you can. But we do believe there are some relief arrangements that are marketed as being relatively "safe" even though they are full equity. You could also consider the level of overall holdings in the context of overall wealth.

Q: Is this the end of successor/nominee pensions for anyone inheriting a pension from someone over the age of 75? Inheriting cash over income taxable pension?

A: Not necessarily, as can be seen by the modelling in the presentation sometimes the net benefit for your beneficiaries can be greater by inheriting pension money from an over 75.

Q: Surely take pension withdrawals, pay 20% Tax, give away the surplus income (no IHT liability).Beneficiaries invest money (ISA/pension) surely that wins?

A: No, it is not as simple as that. As covered in the webex it depends on tax position of the client and their intended beneficiaries. Income tax implications are key. As a general rule of thumb, if, the member's lifetime taxes are higher than the beneficiary taxes, then it's pension last. If members lifetime taxes are less the beneficiary taxes then it's pension first. Then you have to factor in the growth differential between pension and non-pension assets

Q: If client wants full control of his Estate then Protection is surely the answer assuming he is insurable?

A: You can have control by using trusts. If you mean full access then we agree, assuming they are comfortable funding the premiums and the premiums can be maintained until death. As pointed out in the webex, the lapse risk needs to be considered.

Q: Can an EOW be used to leave pension benefits to non-earning grandchildren for them to withdraw within their personal allowances?

A: It can be used to nominate them. The beneficiary then has a choice on the shape of how the death benefit is taken i.e. lump sum, designate to drawdown or a combination of both (assuming both lump sum and income options are available from the scheme).But tax efficient withdrawal would be possible e.g. designate to drawdown then take income within the personal allowance

Q: Is it reasonable to plan now on the assumption that the proposed changes will happen?

A: Each individual advice firm will need to decide at what point they are willing to advise specifically based on the changes. Policy seems set and very rarely changes when we get to this point.   Additionally, tax free money should always have been moving to avoid the post 75 income tax disadvantage so we do not see why this cannot start as for many it should already have been getting done.

Q: There is a risk of a pension withdrawal increasing a client's IHT liability if they pass away before April 2027. Is the long term benefit worth this risk?

A: That's a judgement call.  A 2 year term policy could be used to mitigate the risk. You would benefit from starting your 7 year clock earlier. 

Q: Apart from the spouse, is there any point in nominating other beneficiaries?

A: Yes, you may not want your spouse to get the money or increase their estate by the value of your pension.  You may also wish to use your NRB on first death getting some of your money to someone other than your spouse.

Q: So if a pension is left to a Bypass Trust for spouse as first benefit when pensions are part of the Estate, would this utilise NRB for the deceased?

A: Yes, money left to a bypass trust is not exempt from IHT and is a charageble transfer (chargeable transfers covered by the NRB are taxed at 0%).

Q: What's the position when the LSDBA is also a factor for payment to bypass trust. Does the LSDBA charge also come with a 45% tax credit for beneficiaries?

A: We thought it should be 45% but HMRC trusts advised it is a capital payment and should have a 20% tax charge.

Q: What did you mean by each pension has a NRB going into the trust. do you mean that the trust might have £900k plus IHT threshold for the periodic charges?

A: Each pension is a settlement in its own right with its own 10 year period and 7 year cumulation. These are maintained when they are consolidated into one pension and / or paid to a bypass trust

Q: Hello - is there not an entry charge to go into a bypass trust? So the IHT benefit is reduced as the fund is reduced when going into the trust?

A: Entry charges only apply to lifetime transfers so unless you set up a bypass trust with a value greater then the available NRB there will be no entry charge.  There will be no entry charge when the death benefits are paid. On death you just work out the IHT due which will depend on whether the transfers on death are exempt or chargeable. Funds left to a bypass trust are not exempt from IHT and are chargeable transfers (chargeable transfers covered by the NRB are taxed at 0%).

Q: I thought you paid 45% tax if you left pension money to a trust?

A: The 45% tax charge applies after age 75 and before 75 but outside the 2 year window.

Q: Lend the £325k to the surviving spouse to cap growth in Bypass Trust and remove the 6% periodic charge?

A: That is an option. The beneficiaries may not be happy with an asset wth no growth mind you!

Q: Can you do a session or pointer to further information around the Bypass trusts please?

A: We may do a specialist session on SBTs in the meantime here is our page on Tech Matters.

Q: If Trust Law changes for Pensions and IHT will this allow the Government to change Trust Law for other products like Investment Bonds and Life Assurance?

A: Trust law isn't changing IHT tax law is changing.  If you think about it there is no correlation as it is completely different circumstances.  If you put an asset in an IHT effective trust you no longer have access to the asset. Compare that with your pension under trust - you hav access to the asset right up until death.  Trust based pension schemes will still need to abide by their trust deeds and trust law.

Q: Have you heard anything re the rumours of relief being equalised across AIM and BR investments? Another potential planning tool could be reduced!

A: Yes, we hear all the rumours too.

Q: I keep reading about some new rules coming in from September which will limit the amount you can withdraw. Is this true or scaremongering?

A: We haven't heard anything specific on this but did hear a suggestion of reintroducing GAD limits to prevent pension drawdon exhaustion.

Q: Could Rachel Reeves really limit gifts in a lifetime? How could they control this??

A: Not on her own, a finance bill would need to be passed to become an act. But yes, gifting could be limited. As for monitoring we live in a country of self-assessment and if you breach the rules you are meant to report this. It's also likley you would be required to report clients that you know are evading any rules on this.

Q: Are the pensions already being drawn by beneficiaries going to be income taxable after April 2027?

A: There are no changes to the income tax of existing benefits.

Q: What modelling software for retirement & inheritance tax panning would you recommend?

A: We use Excel in the team.

Q: When might it be appropriate to use a lifetime mortgage to facilitate gifting, creating a debt on a main residence in order to reduce a potential IHT liability?

A: Sorry to be flippant again, but when it meets the client's objectives.  We have modelled before and it can result in more wealth to the next generation but the numbers are sensitive to the interest rates charged and any movements in them. There are obviously lots of ancillary issues.  You cannot borrow to use business relief you can only borrow to gift in the IHT space.

Q: If someone owns BPR assets (e.g. farm), can they gift these assets prior to the changes to allow beneficiary to benefit from BPR protection ?

A: BPR assets can be gifted and the recipient can get business relief.  Best see a specialist when dealing with farmers.

Q: These scenario calculations look great, but very complicated and lengthy to produce from scratch - will M&G provide some useful calculator tools? Might need it?

A: The scenarios discussed in the webinar can be modeled using any projection tool, such as our LSA/LSDBA modeller. While we do not plan to release a dedicated tool, we are considering a simple modeling tool to assist, as well as a calculator to outline the outcomes for lump sum pension gifting as shown in the webinar.

Q: Is there any value in using "direction" rather than "expression of wish" for pension death benefits post April 2027?

A: There are pros and cons.  Discretion can help in cases where it's likely the deceased would not want the pension to go to the person that has been previously nominated. For example, after a divorce it's unlikely that you would want the pension to go to your ex. But if you have a binding nomination and have not updated this nomination then the ex will get the pension. A discretionary scheme has to do their information gathering to decide who would be the best beneficiary, in this instance it's likely that they would select another beneficiary.  Direction would obviously pay quicker but may be to someone that they would rather not have it paid to.

Q: What may be an average annual charge by an accountant/solicitor to complete tax returns and administration for a bypass trust?

A: You would have to ask an accountant or solicitor what they would charge for returns or professional trustee duties.

Q: Is there talk of removal of PCLS?

A: There are always rumours of this when a budget is looming, but so far the rumours have never come to fruition. Whilst we don't have a crystal ball, it would be very unlikely for there not to be some form of protection on what you have built up.
- When the LTA was introduced in 2006, we had primary and enhanced protection and protection of tax free cash

- The AA reduced from £255k to £50k effectively from 14 October 2010, a straddling penison input period was created to accommodate those that had already paid in more than £50,000
- The LTA reduced from £1.8m to £1.5m in 2012, we got fixed protection 2012
- The LTA reduced from £1.5m to £1.25m in 2014, we got fixed protection 2014 and individual protection 2014
- Pension input periods were aligned with tax year and to accomodate those that had paid in more than one AA's worth of contribuions, we had pre and post commencement pension input periods.
- The LTA reduced from £1.25m to £1.0m in 2014, we got fixed protection 2016 and individual protection 2016

Long story short, future PCLS could be restricted, but it would be unlikely for what you have presently built up not to have some form of protection.

Q: There's talks of TFC being reduced to £40k - is this likely?

A: You can never say never but we think it's unlikely accrued PCLS will be removed from anyone. They may change the future rules on accrual. There has only ever been one legislative change where tax free cash was reduced that we can think of and it was niche for s226 policyholders over 70 in 2006 when the calculation moved to 25% from 3 x residual annuity.

Q: Can you use the £3,000 annual gift allowance to help fund whole of life?

A: Yes.

Back to top