CIOT Autumn Tax Conference – 2

Do the reforms of the former Chancellor George Osborne of the treatment of pension funds left over on a person’s death, represent an opportunity for important IHT Tax planning for individuals?

The new rules are on the face of it, straightforward and generous.

If you die, and you are less than 75 years old, undrawn money left in your pension pot, can be paid out to your beneficiaries, free of IHT, income tax, or Capital Gains tax: if you are 75 years old or over, the money paid out will be taxed as income of the person receiving it.

This has lead some to advise that the smart thing to do, is to put all your surplus money into a pension fund, and then die before you are 75 years old.

Leaving aside the obvious life-style drawback of using this strategy, it is worth examining the detail of what is involved:

a) the rules are subject to the Lifetime Allowance, ie in general will apply to a maximum of £1.0m undrawn pension fund – the excess being taxed at 55%;

b) because of the annual restrictions on the amount that you can contribute to a pension, you need to plan well in advance, probably a minimum of 8 years or so before you retire, if you are going to end up with the optimal excess left in your pension fund when you die;

c) depending on the financial circumstances of those you leave your money to, the income tax that they would pay on payouts from your scheme if you are over 75 years old when you die, may well equate to the rate of IHT, 40%, saved by the funds not being counted as part of your Estate, with the overall impact being neutral;

d) given the practical and technical constraints on the upper values that can be sheltered, opportunities for cascading the wealth down through future generations are limited.

In conclusion, although it is important to know the rules and to recognise the value of the reliefs on offer, do not let yourself get carried away.