Some of the confusion surrounding the inheritance tax treatment of pensions was cleared up in Budget 2006. It was confirmed that pension money held by investors aged 75 or over will be subject to inheritance tax at 40 per cent when the investor dies.
But have some areas of the new rules have been left deliberately unclear, leaving the door open for the government to spread its tax net on pension investors even wider?
Investors who were keen to set up so-called “family” self-invested personal pensions (SIPPs) in an attempt to pass on pension assets to offspring free of inheritance tax (IHT), under the draft rules, those pensions held by people aged over 75 would have escaped inheritance tax completely.
This loophole has now been formally closed. Under the new rules announced, which took effect on April 6 this year, the first day of the “A-Day” pensions regime, pension fund assets of people aged over 75 will form part of their estate for IHT purposes.
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Any liability will be deducted directly from the pension fund. IHT is levied on estates above the nil-rate band which, for this tax year, increased to £285,000. But pension fund assets of people aged over 75 which are passed to spouses, civil partners, dependants or charities will escape IHT on the first
death.
However the previous more generous pension rules for people aged under 75 will continue to apply, meaning that money held in pensions by investors aged under 75 could escape IHT. Investors who are under 75 and who are drawing an income from their pension via an income drawdown plan, will have their pension fund taxed at 35 per cent on death.
The new tax rules apply to the Alternatively Secured Pension (ASP), the new income drawdown regime for over-75s. Despite confirmation that IHT will apply to money held in ASPs, there could still be demand for “family” or “vulture” SIPPs that allow surplus assets in pensions to be passed on to heirs. |
