Pensioners with an alternatively secured pension will find their pensions are subject to inheritance tax after A-Day, HM Customs and Revenue has just confirmed.
As a result, any pension scheme member with an alternatively secured pension (ASP) will find beneficiaries face IHT on the fund, except where exemptions are made in relation to charity allocations and financial dependents.
Budget papers say the present rules will continue to apply to registered pension schemes in much the same way as they do currently for members aged below 75 in income drawdown or deferred pension.
IHT will apply to members, when they do not take their pension when their life expectancy becomes seriously impaired, and this decision results in an enhanced death benefit being paid to beneficiaries. Currently there is a concession where IHT is not charged if the beneficiary is a spouse, civil partner or person financially dependent on a member. This concession will be legislated in the Finance Bill and any payments made to charity under the same circumstances will also be exempt form IHT.
However for those who go into ASP after the age of 75, IHT will also apply. The Government says it has made it clear ASP is specifically designed for those with principled religious objections to annuities, but adds it has become clear some individuals and advisers are intending to use it for a wider purpose of allowing individuals to pass on tax-privileged retirement savings to dependents.
In order to prevent this the Government has decided to apply IHT on ASP funds in the following ways:
- IHT will apply to any funds paid as a “transfer lump sum death benefit”, where funds are left in a pension scheme to be redistributed to members, or refunded to an employer, or used to provide benefits for a dependent (in the pension scheme context) who is not a spouse, civil partner or person financially dependant on them.
- Any funds left over, once the spouse, civil partner or exempt dependant has finished with them, will also be subject to IHT either on the death of the beneficiary or on the stopping of the benefits, whichever comes first. However any leftover funds given to charity will be exempt.
- Any funds paid to charity will be exempt from IHT, as will any funds left to a spouse, civil partner or financial dependant.
- An IHT charge will also fall onto the estate of a dependant, where they opt for an ASP from “benefits” inherited from a member who died before the age of 75.
There are two places within the rules where tax charges on ASP funds overlap. One is where the funds are paid to an employer, and the other is where on the death of a dependent under age 75, a lump sum is paid out and not to charity. In these instances, the IHT charge will take priority over the pension scheme tax charge which will be applied to the fund after IHT deductions.
To co-operate with the rules, personal representatives of estates will be required to provide information in the estate account about the use of an ASP, including an estimate of the value of left-over ASP funds. Meanwhile the pension scheme administrator will be responsible for accounting for and paying any IHT due on the ASP funds.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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