The Taxation of Pensions Bill 2014/15 has now moved on to the next stage of the Parliamentary process. The Public Bill Committee is now considering the draft legislation in detail. However it is widely expected that the draft legislation will be adopted and will be in line with the original proposals.
The present position
In many cases members of pension schemes are asked to complete non binding forms of nomination requesting that the pension trustees distribute any lump sum death benefits to particular members of scheme member’s family on his or her death.
In certain circumstances these death benefits are in fact taxable at the rate of 55%.
The Proposed New Rules
The new proposals are that this relatively high rate of tax should be abolished and replaced instead with the following:
• If the pension holder dies before reaching the age of 75 any tax charge on the lump sum death benefit would no longer apply and the funds could be withdrawn tax free.
• If the pension holder dies over the age of 75 then the lump sum death benefit could remain within the pension and beneficiaries could draw it down over a period of time and would be taxed at their own marginal rate of income tax on the amounts received. Alternatively it would be possible to make a lump sum withdrawal where the proposal is that a tax charge of 45% would apply.
Planning Opportunities
These proposed changes do give rise to IHT planning opportunities. On the basis that it will be possible for these benefits to be withdrawn tax free in future where the pension holder dies under the age of 75, might on the face of it appear to be attractive. However a large lump sum passing into the estate of say a widowed spouse, will increase the taxable value of her estate on their later death.
An alternative approach would be to request that the lump sum death benefit is paid to a trust where the widowed spouse and the children and remoter descendants of the pension holder are all potential beneficiaries. The funds would then be held outside of the estate of the widowed spouse and would not be subject to IHT on their death. There are other tax considerations to bear in mind but the proposed changes to the rules do give rise to the possibility of making greater use of pension funds and the contributions to them for IHT planning purposes later.
Ian Newcombe is the partner in charge of the Exeter Private Client Team of Stephens Scown LLP. He and his team are able to provide IHT planning advice and assist attorneys with making applications to the Court of Protection for the approval of IHT planning schemes where required. Contact the team on 01392 210700 or by email private.client.exeter@stephens-scown.co.uk