Inheritance Tax & Pension Funds
The Finance Bill 2016 provides that undrawn funds will not become liable to inheritance tax for all deaths on or after 6 April 2011.
In light of the new rules, there may be scope for tax planning as provided that certain conditions are met, the new rules may enable individuals to pass on undrawn monies from a pension fund to a beneficiary free from inheritance tax.
In the event of the death of the individual before the age of 75, the pension fund can be passed to beneficiaries as a lump sum free from inheritance tax or income tax, regardless of whether benefits have been taken from the fund or not. Alternatively, the nominated beneficiary can continue to receive the pension fund as draw-down tax free.
In the event of death after the age of 75, the beneficiaries can opt to take the pension as a lump sum taxed at 45% (or from the beneficiary’s marginal rate from 6 April 2016). Alternatively, they can drawdown from the fund themselves, which will be taxed at their marginal rate of tax. There will be no inheritance tax charge to the fund on death.
It should be noted that these rules will not apply if you are in ill health, know about the ill health, and die within two years of making a pension contribution. This is because HM Revenue & Customs may consider this to be a deliberate attempt to minimise the taxable estate and reduce inheritance tax payable.
The retirement fund which can be built up by a taxpayer to provide tax-favoured benefits is subject to a lifetime allowance. The lifetime allowance is currently £1.25m, reducing to £1m from 6 April 2016.
Taxpayers and their advisers should consider pension contributions not only in terms of retirement and income tax planning, but also a useful tool for inheritance tax planning.
Specific advice should be taken as inheritance tax planning is not a one size fits all approach.