How IHT 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.
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 as the DC scheme will probably offer more flexibility. HM Revenue & Customs (HMRC) considers this to be a transfer of value due to the fact the individual could direct the transfer to an arrangement where the estate would be entitled to the death benefit.
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:
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.