HMRC case studies
During her working life, Emily made contributions to a DC scheme. She does not leave a surviving spouse or civil partner. At the date of her death, aged 73, her pension fund is valued at £700,000. The remainder of her estate is valued at £800,000. During her retirement, Emily did not draw on her DC pension as she had other assets and savings to meet her everyday spending requirements. Following her death Emily’s DC pension fund will pass to beneficiaries chosen by the pension scheme. Under the pension scheme rules the fund can be taken by the beneficiaries either as a lump sum death benefit payment, or as a flexi-access drawdown pension.
Current position
For inheritance tax purposes Emily’s estate is valued at £800,000. The DC pension fund does not form part of Emily’s estate for inheritance tax purposes because Emily does not have a power to dispose of it as she wishes. Emily’s estate is liable to inheritance tax of £190,000 (£800,000 - £325,000 nil rate band = £475,000. Inheritance tax charged at 40% = £190,000).
Position from 6 April 2027
The value of Emily’s DC pension fund will be included within her estate immediately before her death for inheritance tax. Emily’s estate, for inheritance tax purposes, will be valued at £1,500,000 and the inheritance tax liability will be £470,000. (£1,500,000 - £325,000 nil rate band = £1,175,000. Inheritance tax charged at 40% = £470,000). The PSA would be liable to pay £219,333 from the unused pension funds before paying any benefits. The personal representatives would be liable for inheritance tax on rest of the estate of £250,667.
Jas dies aged 65, without leaving a surviving spouse or civil partner. Under the terms of her DB pension scheme, a lump sum death benefit of £200,000 is payable on death provided she had not started to take her pension, which she hadn’t. Jas had made plans for her son to receive the lump sum death benefit. As the pension scheme was discretionary, Jas could only express her wishes that any lump sum death benefit was paid to her son. As her son is not classed as a dependant, as he is 33, there will no dependant’s pension paid out. At the date of her death, the remainder of Jas’s estate is valued at £400,000.
If Jas had crystallised her DB pension before death, there would be no lump sum death benefit payable and her inheritance tax position would be altered by this change.
Current position
For inheritance tax purposes, Jas’s estate is valued at £400,000. The lump sum death benefit is not included as Jas was not able to make a binding nomination as to who would receive the benefit. Jas’s estate is liable to inheritance tax of £30,000. (£400,000 - £325,000 nil rate band = £75,000. Inheritance tax charged at 40% = £30,000).
Position from 6 April 2027
The value of Jas’s lump sum death benefit will be included within her estate immediately before death for inheritance tax. Jas’s estate, for inheritance tax purposes, will be valued at £600,000 and the inheritance tax liability will be £110,000. (£600,000 - £325,000 nil rate band = £275,000. Inheritance tax charged at 40% = £110,000). The PSA would be liable to pay inheritance tax of £36,667 from the lump sum death benefit before paying this to her son. The personal representatives would be liable for inheritance tax of £73,333.
During his working life, Joe made contributions to a DC scheme. At the date of his death, aged 70, his remaining pension fund is £50,000. The remainder of his estate is valued at £260,000. Following his death, Joe’s DC pension will pass to beneficiaries chosen by the pension scheme; this may be paid as a lump sum or as a pension. The remainder of his estate will pass to his nephew as he has no other next of kin.
Current position
For inheritance tax purposes, Joe’s estate is valued at £260,000. The DC pension fund does not form part of Joe’s estate for inheritance tax purposes because he does not have a power to dispose of it as he wishes. No inheritance tax will be due as the value of the estate is below the nil-rate band of £325,000.
Position from 6 April 2027
The value of Joe’s DC pension fund will be included within his estate immediately before his death for inheritance tax. Joe’s estate, for inheritance tax purposes, will be valued at £310,000. No inheritance tax will be due as the total value of the estate including the pension death benefit is below the nil-rate band of £325,000.
Andrew dies aged 70. At the date of his death, the value remaining in his DC pension fund is £400,000. The remainder of his estate is valued at £1,200,000 which passes to his civil partner. Although Andrew expressed his wish for any value remaining in his pension to be passed to his civil partner, this is at the discretion of the pension scheme trustees. Generally, transfers between spouses or civil partners are wholly exempt from inheritance tax.
Current position
For inheritance tax purposes, Andrew’s estate is valued at £1,200,000. The DC pension fund does not form part of Andrew’s estate for inheritance tax purposes because he does not have a power to dispose of it as he wishes. As the remainder of Andrew’s estate passes to his civil partner, the transfer is exempt from inheritance tax, meaning no inheritance tax is due.
Position from 6 April 2027
The value of Andrew’s DC pension fund will be included within his estate immediately before his death for inheritance tax. Andrew’s estate, for inheritance tax purposes, will be valued at £1,600,000. Assuming the value remaining in Andrew’s pension fund as well as the remainder of his estate passes to his civil partner, the transfer of both the estate and the pension fund will be exempt from inheritance tax, meaning no inheritance tax is due.
If the value remaining in Andrew’s pension fund is paid to someone other than his civil partner, the nil-rate band may be available to reduce the inheritance tax due on the pension death benefit, with inheritance tax being due on the amount above the nil rate band.
During his working life, Amir made contributions to a DC scheme. At the date of his death, aged 80, the pension fund is valued at £400,000. The remainder of his estate is valued at £1,000,000. Following his death Amir’s DC pension fund will be paid to beneficiaries chosen by the pension scheme trustees, although he has nominated his grandchild. The pension scheme rules allow the fund to be taken by the beneficiaries either as a lump sum death benefit payment, or as any type of pension income. They choose to follow Amir’s nomination and pay to a beneficiary who is not a surviving spouse or civil partner.
Current position
For inheritance tax purposes, Amir’s estate is valued at £1,000,000 and is liable to inheritance tax of £270,000 (£1,000,000 - £325,000 nil rate band = £675,000. Inheritance tax charged at 40% = £270,000). The DC pension fund does not form part of Amir’s estate for inheritance tax purposes because Amir does not have a power to dispose of it as he wishes.
Income tax will be due on any lump sum or pension paid to the beneficiary as Amir was aged over 75 when he died. The PSA will usually deduct income tax at recipients’ marginal rate from payments when they are made.
Position from 6 April 2027
The value of Amir’s DC pension fund will be included within his estate immediately before his death for inheritance tax. Amir’s estate, for inheritance tax purposes, will be valued at £1,400,000. Amir’s estate is liable to inheritance tax of £430,000 (£1,400,000 - £325,000 nil rate band = £1,075,000. Inheritance tax charged at 40% = £430,000).
The PR will be liable for inheritance tax of £307,143 which is paid from the non-pension element of the estate.
The PSA is liable for inheritance tax of £122,857 on the pension element of Amir’s estate. When this is deducted from the pension fund, it leaves £277,143 which the grandson can then decide how to split between a lump sum or pension income. As at present, if needed, the PSA will deduct income tax at the grandson’s marginal rate when payments are made. The rate could vary depending on how the grandson takes the benefits.
Max was a member of a non-discretionary pension scheme where he was able to choose who would receive his pension death benefit. Max died age 77. At the date of death, Max had an estate worth £275,000, as well as a pension death benefit worth £1,000,000. The pension death benefit passes to Max’s chosen beneficiary, his child.
Current position
Based on a nil-rate band of £325,000 and an inheritance tax rate of 40%, the tax due will be £380,000 (£1,275,000 - £325,000 nil rate band = £950,000. Inheritance tax charged at 40% = £380,000).
As the inheritance tax charge is greater than the £275,000 the PRs have access to, the amount that they pay will be limited to £275,000. For any remaining tax due, HMRC would request payment directly from the beneficiaries of the pension scheme. In this case, HMRC would approach the beneficiary of the death benefit (Max’s child) for an inheritance tax payment of £105,000 (£380,000 - £275,000). The PRs may also approach Max’s child for repayment of the inheritance tax charge that was paid out of the estate that relates to the pension element, a further £193,039.
Where HMRC requests payment of the inheritance tax liability from a beneficiary, if the death benefits haven’t been paid out as a lump sum, the beneficiary may need to withdraw funds from the pension scheme in order to pay the inheritance tax charge. As Max was aged 77 when he died, any withdrawal would also be subject to income tax at the beneficiary’s marginal rate.
Position from 6 April 2027
The value of Max’s pension death benefit will be included within his estate immediately before his death for inheritance tax. Max’s estate, for inheritance tax purposes, will be valued at £1,275,000 and the inheritance tax liability will be £380,000. (£1,275,000 - £325,000 nil rate band = £950,000. Inheritance tax charged at 40% = £380,000).
The value of Max’s pension death benefit will be included within his estate immediately before his death for inheritance tax. Max’s estate, for inheritance tax purposes, will be valued at £1,275,000 and the inheritance tax liability will be £380,000. (£1,275,000 - £325,000 nil rate band = £950,000. Inheritance tax charged at 40% = £380,000).
The PR will now be liable for inheritance tax of £81,961, payable out of the non pension element of the estate.
The PSA is liable for inheritance tax of £298,039 on the pension element of Max’s estate. When this is deducted from the pension fund, it leaves £701,961 for Max’s child.
Peter dies aged 76, having taken some of his pension but leaving 2 DC schemes with unused funds. He leaves most of his estate to his surviving spouse, but some to his 2 children. His nominated beneficiaries for his discretionary pension schemes are his spouse (50%) and children (25% each) in both pension schemes. The PSAs pay in line with his wishes. The value of fund held by Pension Scheme 1 is £200,000, while Pension Scheme 2 has £250,000.
The total value of the non-pension element of the estate is £700,000. Peter chooses to leave £500,000 to his spouse, with the remaining £200,000 going to his children. The total value of the estate is therefore £1,150,000.
The value of the estate liable for inheritance tax is therefore £425,000, taking into account the inheritance tax spouse exemption. (£1,150,000 - £500,000 - £225,000 = £425,000). The £225,000 reflects the payments of £100,000 and £125,000 from the 2 pension schemes to his children.
Peter’s total estate is liable to inheritance tax of £40,000 (£425,000 - £325,000 nil rate band = £100,000. Inheritance tax charged at 40% = £40,000). The pension element makes up 53% of the estate and therefore the PRs advise the PSAs of Pension Scheme 1 that they have £76,471 of nil-rate band attributable to their payments. Whilst Pension Scheme 2 has £95,588.
Peter’s wife would receive 2 payments of £100,000 and £125,000 respectively from the 2 PSAs, which will be paid subject to income tax at her marginal rate (if this was 40% she would pay £90,000 of income tax).
Each child will receive a payment of £45,294 (£50,000 net of inheritance tax) from pension scheme 1 and £56,618 (£62,500 net of inheritance tax) from pension scheme 2. This would a total of £101,912 taxable income at their marginal rate (if this was 40% they would each pay £40,765) which would be deducted the pension schemes.
