Stand-out Q – IHT planning…
Our Technical Hub provides access to a wide range of pension tax and trust technical resources. Every now and then we post tweets covering stand out questions from our technical content and our answers in case others might also find them helpful. As Twitter’s character restrictions only allow for the bare bones of the Q&A we link to the details here, too.
Should a client save into their pension as part of IHT planning?
Provided a member has not made a binding nomination in respect of any pension savings, no inheritance tax charge should apply on a member’s death.
The income tax treatment of any withdrawals depends upon the member’s age at the date of death. Provided they are under the age of 75 at death, there will be no income tax charge on any income withdrawals. This means that the beneficiary will be able to access the pension fund tax free following the member’s death.
Where the member is 75 or over at the age of death, income tax will be due when any withdrawals, including lump sumps, are made by the beneficiary. In this instance, any tax charge when the beneficiary takes any income from the inherited pension fund is delayed until funds are withdrawn.
The effect of this tax treatment is that, where an individual’s affairs can be arranged so that their pension savings remain relatively intact following their death, they can potentially save inheritance tax on their death.
Albert, a widower, is 74 at his death. He has £1m in savings. If it is all held within his estate, and he has both his and his wife’s nil rate bands available in full, the inheritance tax position on his death is as follows. Albert and his late wife never owned their own home so residence nil rate band does not apply.
If Albert holds £500,000 in his estate and £500,000 in pension savings, there is no inheritance tax on his death (his estate is covered by the combined nil rate bands). The beneficiaries of Albert’s pension fund also escapes any tax liability, as Albert was under 75 at death.
If Albert was 76 on his death, income withdrawals by beneficiaries from his pension would suffer income tax at the beneficiary’s marginal rate. It may be possible to stagger income withdrawals so that the maximum marginal rate applied is 20%.
Where members can make further pension contributions without incurring an annual allowance charge and the pension fund is unlikely to exceed the lifetime allowance, additional contributions should therefore be considered as part of an individual’s IHT planning as this can result in a tax saving on the member’s death.
Follow us on Twitter – @JHPartnership