Online News - Business News - Date: July 2010
New IHT treatment of unused pension pots
HM Revenue & Customs have issued a document explaining the new inheritance tax treatment of unused pension pots of those aged over 75, as announced in last month's emergency Budget.
Currently, any funds that have not been used to buy benefits or annuities (called "uncrystallised funds") are subject on death to tax charges of up to 70 per cent on. This is now to be reduced to 35 per cent. The policy is tied in to the coalition government's announcement - also in the Budget - that from April 2011 people will no longer have to use their pension pots to buy an annuity when they reach the age of 75.
The interim guidance applies to members of registered money-purchase pension schemes who reach age 75 on or after 22 June 2010. Personal representatives of deceased pension scheme members may also be significantly affected by the change.
The new rules are necessarily complex. But essentially, the special inheritance tax charges of section 151 A-C of the Inheritance Tax Act 1984 will no longer apply to pension scheme members who have not yet taken their pension benefits by the age of 75.Instead, any funds remaining in the pension pot on death may be paid out to beneficiaries as an unsecured pension fund lump sum death benefit, taxed at 35 per cent.
However, HM Revenue & Customs will retain the power to make a special IHT charge under IHTA s.3(3), in cases where the deceased pension scheme member has deliberately delayed taking a pension to allow the death benefits to pass to his beneficiaries. Also, the changes do not follow through for the purposes of the anti-avoidance provisions at IHTA section 151D.
The new Finance Bill 2010 introduces transitional rules exempting those who reach 75 on or after 22 June 2010 from buying an annuity until they reach the age of 77, so they can defer their decisions until the new rules are finalised next year.
These changes are a welcome relaxation of the rules and should now not deter those making significant pension provision from continuing to do so safe in the knowledge that the Government is not going to penalise their family for doing so.
For more information or advice please contact Peter Blinkhorn on 0113 204 4214 / 0789 427 9292 or email peter.blinkhorn@kirknewsholme.co.uk.
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