At point 11.1 it says that a pension fund chargeable to IHT from 6th April 2027 will form part of the “general” component of an estate for the purposes of calculating whether the 36% rate applies.
I’ve seen it suggested that some people in the industry think it would be an improvement if pensions were a separate component for that purpose. Do forum members know if this is something the government is considering?
I can certainly see significant disadvantages to a pension lump sum forming part of the general component.
All the guidance I had read before the technical note came out also suggested that pensions would fall into the general component. I do agree that it would be nicer to have a separate component though!
Wouldn’t be surprised to see more charitable gifts being drafted using the 10% amount as opposed to a simple pecuniary legacy or fraction of residue.
The problem with using the 10% amount is that this will include 10% of the pension fund even though none of that may be payable to charities so the legacy would have to be funded from other assets, reducing the amount going to residuary beneficiaries who may not be the same as the pension fund beneficiaries.
Look at the obligations that the PR takes on. Ontaining a reply from a pensions provider within 6 months will be a challenge. Gathering information will not be assisted by the much talked about pensions dashboard.
We have had 33 Pensions Ministers since 1945 so hopefully this legislation will be repealed in the next 10 years
Yes. I think the worst consequences will be for those who drafted wills before the change, since someone who did that but also has a significant pension fund must have done one of two things, either:
10% of free estate to charity, 90% to family - thereby running the risk that they haven’t left enough to get the lower rate; or
10% of the baseline amount of the general component to charity, residue to family - thereby running the risk that they have left much less to the family than they intended.
But, back to my question, a separate “component” would seem a better bet and more in keeping with the logic of the original legislation. Does anyone know if the technical committees or professional bodies are looking into this or advocating one way of the other?
Andrew, I attended a virtual conference on the subject in March and this question came up. My understanding is that the point has been made to HMRC but their most recent update has confirmed that the Pension forms part of the general component so as yet they have not changed their view. That of course is no guarantee that there will not be further changes…
True. Although I suppose HMRC can do no better than apply the law, and to be honest I think their interpretation of the legislation on this point is correct. I believe a legislative change would be needed to bring in a new component.
My understanding is that there will be the opportunity to nominate 10% of the estate to charity specifically via the pension expression of wish. When assuming that the pension beneficiaries would otherwise pay income tax at higher or additional rate (ie. members death 75 or over), the figures stack up very favourably, as the charity received the charity lump sum death benefit income tax free.
I am finding it harder to find pension schemes that will accept bespoke LOW’s to accompany expression of wish forms, which could, for example, explain the wish to nominate 10% of the estate, via the pension, to charity. I’d be keen to hear forum members views on how these can be written hand in hand?
And, once pension funds are inside the estate, is there any point in the expression of wish being an expression of wish at all! The purpose of the pension administrators retaining discretion was to avoid a binding nomination, so that IHT did not apply.
I’ve not heard that. Indeed the same technical note with which I started this chain says “These lump sums are deliberately limited to money purchase arrangements where the deceased member had no dependants. This ensures that pension funds are used to support dependants where they exist.” Which suggests the opposite: namely that except in certain limited cases you won’t be able to nominate part of the pension to charity by way of the LOW.
A pension lump sum death benefit paid to a charity may or may not be a “charity lump sum death benefit”. A charity lump sum death benefit must meet certain criteria (e.g. no surviving dependent of the member) in order to be exempt from assessment against the lump sum and death benefit allowance or tax charges where the member has died age 75 over (special lump sum death benefit charge). A pension death benefit could be paid to a charity without necessarily qualifying as a “charity lump sum death benefit” it just wouldn’t benefit from the same tax exemptions.