Last week, the government announced plans to change income tax rules for inherited pensions which would make them liable for marginal rate income tax.
It’s not yet fully clear how the proposed tax change will work as the measure was only briefly mentioned as part of new guidance on the removal of the lifetime allowance.
What do we know?
As part of ‘Legislation Day’ on 18 July, a brief announcement was made that from 6 April 2024, government intends to charge tax on pensions benefit at marginal rates of tax.
This follows the announcement in the Spring Budget 2023 regarding the removal of the lifetime allowance cap which removed tax liability on larger pension pots in excess of £1.07m.
This would change the tax treatment of payments of uncrystallised and crystallised lump sum death benefits in the event a pension holder died before the age of 75, charging tax at the marginal tax rate.
It can only be assumed that this measure is being introduced in order to offset the loss of tax from the removal of the lifetime allowance, but the measure would capture all pension beneficiaries as it is currently set out.
What are the implications?
HMRC says that the measure will affect people who are in receipt of inherited pensions. If the amount is paid to qualifying persons, it will be counted towards the deceased member’s lump sum tax free limit, and the excess will be taxed at each beneficiaries’ marginal rate.
If the benefit is non-qualifying, it will be counted towards the deceased member’s lump sum tax free limit and the excess will face a basic rate income tax charge under Part 9 ITEPA. If the payment is made outside of the two-year period and the special lump sum death benefit charge (SLSDBC) currently applies in this scenario, then the individual would continue to be subject to this charge.
The changes put forward would subject many more people to taxation, impacting beneficiaries of members who die before the age of 75 who left unused funds in their pension pot.
At the moment, beneficiaries can opt to receive an income either by designating to drawdown or purchasing a beneficiary annuity and receive that income tax free.
This is a huge change in tax treatment of beneficiary pensions from April 2024 and it needs clarification from government sooner rather than later.
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Disclaimer
The information was correct at time of publishing but may now be out of date.
