HMRC docs threaten ability to inherit pension pots free of income tax

A potential big change made ‘through the back door'

Professional Pensions
clock • 2 min read
Steve Webb: If ministers plan to remove this pension tax break they should announce their plans publicly and have them properly debated
Image:

Steve Webb: If ministers plan to remove this pension tax break they should announce their plans publicly and have them properly debated

A bundle of complex tax consultations published yesterday contained a potential bombshell for anyone expecting to inherit a pension pot free of income tax, Lane Clark & Peacock (LCP) says.

Yesterday (18 July), HM Revenue & Customs launched a consultation on changes to pension taxation that could result in ordinary taxpayers having to pay income tax where they inherit an untouched pension pot. 

LCP explained that, as a result of changes announced by former chancellor George Osborne, it has been possible since 2015 to inherit a pension pot free of both inheritance tax and income tax, where the person who died was under the age of 75.

The consultancy explained the consultation was largely focused on the legal changes necessary to implement the abolition of the lifetime allowance (LTA) - the lifetime limit on tax-relieved pension pots.

But it said, whereas the LTA applies only to those with the largest pots, the new proposals would apply to anyone who inherited an untouched pension from a loved one who died under the age of 75 - regardless of the size of the pot. If implemented, the change would take effect from April 2024.

LCP said that, although more detail of the proposed legislation is to follow, the policy statement which accompanied yesterday's announcement said: "Individuals will still be able to receive the benefits … but the values will no longer be excluded from marginal rate income tax under [the Income Tax (Earnings and Pensions) Act 2003], with effect from 6 April 2024".

LCP explained that one advantage of the current system is that heirs can inherit money into a pension pot (eg a ‘beneficiary drawdown' account) where it remains invested, grows tax-free, and can be drawn out free of income tax at any time.

But it said, if the income tax privilege were to be withdrawn on this, the only alternative would be to take the inheritance as a cash lump sum. This would remain tax-free but mean recipient would then have to make difficult decisions about how to invest this money and how to manage it over time, as well as no longer benefiting from the pension ‘wrapper' with its associated tax breaks.

LCP partner Steve Webb explained: "For the last eight years, people have known that if a loved one died under the age of 75 they could inherit an untouched pension pot free of all tax. The money could sit in a drawdown account, being invested and growing, and would be a source of tax-free income whenever needed.

"This tax advantage risks being abolished by next April if these new proposals are implemented.  It would be totally unacceptable to make such a big change ‘through the back door'. If ministers plan to remove this pension tax break they should announce their plans publicly and have them properly debated."

More on Tax planning

Government raises £701m from inheritance tax receipts in May

Government raises £701m from inheritance tax receipts in May

‘Neither of the two main political parties have mentioned it’

Hope Coumbe
clock 21 June 2024 • 2 min read
Protracted probate delays: Helping clients manage expectations

Protracted probate delays: Helping clients manage expectations

Toil and trouble in the Probate Registry

Adam Matthews
clock 10 June 2024 • 4 min read
2024/25 kicks off with £0.7m in IHT receipts; Up £85m on last year

2024/25 kicks off with £0.7m in IHT receipts; Up £85m on last year

HM Revenue and Customs’ monthly tax bulletin was released this morning

Hope Coumbe
clock 22 May 2024 • 1 min read

In-depth

Disillusioned advisers divided on general election hopes

Disillusioned advisers divided on general election hopes

Votes of financial advisers are up for grabs on 4 July

Laura Miller
clock 20 June 2024 • 5 min read
Serving HNW clients: 'Advisers must take a greater deal of care'

Serving HNW clients: 'Advisers must take a greater deal of care'

‘They need bespoke strategies with the expertise of multiple advisers’

Isabel Baxter
clock 17 June 2024 • 5 min read
PA360 North: Leading adviser conference returns to Warrington

PA360 North: Leading adviser conference returns to Warrington

Join us at The Park Royal Hotel & Spa on 1 October

Professional Adviser
clock 21 June 2024 • 1 min read