How inheritance tax might work on transfer
Pensions are not normally subject to inheritance tax. However, there are certain circumstances when the value of the death benefits will count towards any inheritance tax (IHT) payable by the estate.
Important Information
In her Autumn 2024 Budget statement, Rachel Reeves announced the government’s intention to bring unused pension funds and death benefits within the value of an individual’s estate for inheritance tax purposes from 6 April 2027.
More detail can be found in our article Inheritance tax on pension death benefits from April 2027.
The following article is correct based on the current legislation and takes no account of the government’s proposed changes.
This is a complex area but one of the main areas which has caused problems is where the individual is terminally ill and transfers from one scheme to another and dies within 2 years.
Most commonly this is from a Defined Benefit (DB) scheme to a Defined Contribution (DC) scheme (but can also apply to DC to DC transfers) where the receiving scheme offers more flexible death benefits than the original scheme. HM Revenue & Customs (HMRC) considers this to be a transfer of value due to the fact the individual knew they were in ill health and transferred to get better death benefits.
If an individual is transferring when in poor health, they must be made aware of the potential IHT implications. However, even if 40% IHT is applied to the transfer value (and it may not be as high as this due to the way it is calculated) 60% of something is better than nothing which is likely to be what a non-dependent adult beneficiary would receive from a DB scheme.
In this case study we look at Mark who lives in England, and then what the difference would be if he lived in Scotland. These are just examples of how this may work in practice. We would recommend individuals speak to an expert in this area, if further confirmation on how this may work is required.
Further information
Disclaimer
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.