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I have a question about the changes to inheritance pension tax announced in the Autumn Budget.
From April 2027, if you are married and have unused defined contribution pensions when you die, will your spouse inherit the pension tax-free, as would the house, savings, etc.?
Could your spouse then collect the pension at your marginal tax rate?
When your spouse dies, would combined inheritance tax relief apply to any remaining pension?
Thank you. I think many people my age would be interested in hearing the answers.
SCROLL DOWN TO FIND OUT HOW TO ASK STEVE HIS PENSION QUESTION
Pension change: Pots will count towards inheritance tax from April 2027, but where do married couples stand under the new rules?
Steve Webb responds: Before moving on to the changes in the Budget, it is important to appreciate that the basic features of the inheritance tax remained unchanged.
This means that:
– You still have a ‘nil rate band’ of £325,000 per person to deduct from the value of your estate. This figure will remain the same until at least 2030.
– Any unused ‘nil rate band’ in the event of the death of the first member of a couple can be used by the surviving spouse.
– You still have a ‘nil residence rate band’ of up to £175,000 per person, meaning your total allowance is £500,000 if you pass your main home to your direct descendants.
– Any unused portion of this amount can also be transferred to the surviving spouse, meaning the allowance for a couple could be up to £1 million.
– Transfers between spouses (but not between members of common-law couples) are free of inheritance tax.
> Fall Budget: Rachel Reeves’ big changes and what they mean for you
The main thing that has changed (with effect from April 2027) is that when calculating the value of the estate for inheritance tax purposes the value of certain pensions must now be included.
This mainly includes what the Government calls “unspent” balances in defined contribution pensions, as well as certain lump sum death benefits, whether in defined benefit or defined contribution pensions.
The Government estimates that in just under 40,000 cases, estates that would have been subject to inheritance tax in any case (before the budget changes) will now face an additional inheritance tax because pension assets have to be added.
Another 10,000 estates a year will now have to pay inheritance tax because pensions are counted, but they would not have done so if pensions were excluded.
As to the first part of your question, the answer is therefore “yes”: an unused DC pension can be left to the spouse and is not subject to inheritance tax, despite the changes to the budget tax.
And the surviving spouse can tap into that pension fund in the usual way, paying income taxes on the money they withdraw.
Upon the death of the spouse, the estate will be valued in the usual way (but now including pensions) and any remaining inheritance tax relief will be applied to this total figure.
But in terms of the practicalities of it all, the new system will unfortunately be much more complicated for grieving families.
As things stand, the person classifying the estate (known as the “personal representative”) already has to assess the value of the assets in the estate and check whether they are significant enough for inheritance tax to be paid.
My opinion is that this whole process is probably terribly bureaucratic and could significantly slow down the process of sorting out someone’s affairs after they die.
All of this must be resolved before legalization can be granted.
But in the new world where pensions also count as part of wealth, the Government has indicated in its consultation on inheritance tax on pensions that people will have to contact all the “relevant” pension schemes to which the deceased was a member.
Broadly speaking, this means any defined contribution pension with a balance and any other pension from which a death benefit or similar may be due.
The personal representative will need to obtain information from each pension plan and provider about how much the remaining pension is worth, who the beneficiaries are, etc.
Once this information is obtained, as well as gathering information about all other assets, they will need to use a new online HMRC calculator which will calculate how much inheritance tax is due.
Do you have a question for Steve Webb? Scroll down to find out how to contact you.
The calculator will indicate how the inheritance tax bill will be split between the different pension providers and how much the personal representative will have to pay.
The personal representative must then notify each pension scheme of the result of this calculation and the schemes will assess how much inheritance tax they must pay directly to HMRC.
Once the inheritance tax has been paid, the pension plan can release the balance of the funds to the beneficiaries.
My opinion is that this whole process will probably be terribly bureaucratic and could significantly slow down the already lengthy process of settling someone’s financial affairs after they die.
For example, if a pension scheme administrator is inefficient and takes a long time to respond to queries, the entire process will be delayed as the final inheritance tax bill cannot be produced until complete information has been gathered. .
There is still time between now and 2027 for HMRC to rethink how this will all work in practice.
It is one thing for a Chancellor to simply announce, in so many words in a budget speech, that pensions will now be subject to inheritance tax, but working out the practical implications is a huge job.
It is vital to ensure that the Chancellor’s desire to increase income does not come at the expense of additional inconvenience at what is already a difficult time for many families.
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