Latest news with #inheritance tax
Times
15 hours ago
- Business
- Times
Chancellor told to rethink inheritance tax raid on pensions
Savers with pensions worth less than £90,000 should be able to pass on their pots free from inheritance and income tax to spare grieving families the confusion of complex rules, the government has been told. From April 2027 most retirement pots and death benefits will be included in someone's estate for the purpose of calculating inheritance tax (IHT), leaving more families facing hefty tax bills of up to 40 per cent. The change will close a loophole that gives savers a uniquely tax-efficient way of passing on wealth to the next generation — those who can afford it can use other assets to live off in retirement, leaving their pension savings untouched to be passed on inheritance tax-free when they die. But critics have warned that bringing pensions into the IHT net will put a significant administrative strain on grieving relatives. The Investing and Saving Alliance, which represents more than 270 financial services firms, has urged the government to rethink its plans and spare smaller pensions from its tax raid. You can pass on £325,000 of assets from your estate without your benefactors paying any inheritance tax (£500,000 if you leave your main home to a direct descendant and your estate is worth less than £2 million). Any assets above those thresholds are usually taxed at 40 per cent. Anything left to a spouse or civil partner is inheritance tax-free, and they can also inherit any unused allowances, meaning a couple can leave £1 million tax-free between them. This will continue from April 2027. • Surge in wealthy using insurance to beat inheritance tax hit At the moment, pensions are inheritance-tax free, so if you die with a pension pot, you can pass it on to whoever you like and they will not pay any IHT. If you die before 75, they will not even have to pay income tax on withdrawals. Under Reeves's plans, those pension pots will become part of your estate, removing a valuable tax perk. You will still be able to leave a pot IHT-free pot to a spouse or civil partner, but they will not in turn be able to leave it to your children without them having to pay tax on it. One proposal from the Investing and Saving Alliance and the consultancy Oxford Economics is to keep the IHT exemption on inherited pension pots but to only protect those worth less than £90,000 from income tax, regardless of when the pension holder died. If, however, the beneficiary was a dependent of the deceased they would be able to make withdrawals from the pot over time, allowing them to manage the income so they paid less tax. If they were not a dependent, they would have to take the full value as a lump sum. A second proposal is for a tax on inherited pension pots above a certain threshold, with no exemption for spouses or civil partners, which could prove unpopular. The Alliance and Oxford Economics suggested three scenarios that they said would raise the same amount: an inheritance tax of 25 per cent on the value of pots above £150,000; a charge of 30 per cent on values above £200,000; or 35 per cent on values above £250,000. They said that each proposal would raise about £1.3 billion in their first year and £2 billion a year after that. The government estimates that its plan will raise £1.46 billion a year by 2029-30. The Office for Budget Responsibility predicts that IHT receipts, including those from pensions, will rise to £14.3 billion by 2029-30, up from £7.5 billion in 2023-24. The Times understands that the Alliance submitted the second proposal to HM Revenue & Customs during its IHT consultation with the pensions industry between October and January. Renny Biggins from the Alliance said: 'The government's proposal to include pension funds within IHT risks creating unnecessary stress and delays for grieving families, and causing long-term behavioural change among consumers that we don't yet fully understand, particularly around pension contribution levels and withdrawals. 'We show that the government's fiscal and policy goals can still be met without creating additional issues and concerns for people at the worst possible time.' • Why a wealth tax won't work When IHT on pensions is introduced it is expected that pension schemes will have to liaise with the executors of an estate to calculate and pay any IHT due on savings pots. Meanwhile the clock will tick on the six-month deadline in which IHT must be paid to avoid interest being charged on overdue payments. Rachel Vahey from the investment platform AJ Bell said: 'Of the hundreds of replies to the consultation, many in the industry we have spoken to have shared one central message — the IHT proposals are simply unworkable and have the potential to wreak havoc for grieving families. 'There are better solutions out there that don't cause confusion and high costs for executors and beneficiaries, mean swifter payment of benefits to loved ones and tax to HMRC. These solutions would ultimately make it easier for clients to plan how to spend their pension pot and make sure that their loved ones also have enough money to live on.' The Treasury said: 'We continue to incentivise pension savings for their intended purpose — of funding retirement instead of them being openly used as a vehicle to transfer wealth — and more than 90 per cent of estates each year will continue to pay no inheritance tax after these and other changes.'
Daily Mail
20 hours ago
- Business
- Daily Mail
Can I give my adult children my home and put it in trust to beat inheritance tax?
I'm a single parent and so only benefit from one inheritance tax allowance rather than being able to double up as a married couple could. This means I can onlly leave £500,000 inheritance tax-free rather than the £1million a married couple could.
Yahoo
a day ago
- Business
- Yahoo
How to make pension pots tax-efficient
The government's decision to make pensions subject to inheritance tax has derailed many people's pension planning. The current treatment of pensions on death is generous and had led to some people opting to leave their pensions untouched so they could be passed down to loved ones in a very tax efficient manner. With that position potentially changing, people are looking at how they can manage any looming inheritance tax liability. One way is making use of the various gifting allowances to give money to family while they are still alive. Making pensions subject to inheritance tax does bring a whole host of challenges. Those looking to gift their money away to their nearest and dearest in a bid to manage their tax bill may also find that they have given away too much and put themselves at risk of financial difficulties later in life. Read more: How your health can affect your pension There will also be challenges for those left behind, who need to make sure the bill is paid. Trying to manage information across several pension schemes can be unwieldy and could lead to delays in paying the money out to grieving families. You also need to think about what happens if a pension is discovered further down the line as well as the potential for being charged interest by HMRC if an inheritance tax bill is paid late. It's important to say these changes are not set in stone and with this in mind it is vital that alternative approaches are explored. Financial services company Hargreaves Lansdown recently worked with The Investing and Saving Alliance (TISA) on a cross-industry report which explored a couple of different avenues. One option is for inherited pension pots and DB lump sum death benefits to be taken as taxable income over time. This is only an option if the beneficiary is a dependant. If the beneficiary is not a dependant, then they must take the full pension value as a lump sum, paying income tax at the required rate. Another option explores a return to a death tax paid on all unused pension funds and DB lump sum death benefits above a certain threshold. This is a similar position to that which existed in the past. There is still much detail to be worked through, but both options put forward will be easier for people to understand and administer than the government's proposal. The report shows that if the government is committed to tax reform of pensions on death, then there are easier ways to do it, and it should be used as a springboard for a wider discussion on what other options could be considered. With less than two years to go until the implementation of the proposed new regime it is vital that a debate takes place as to the best way forward to make sure grieving families do not face unnecessary barriers and more: How much money do you need to retire? Do you trust your partner enough to give them money for tax purposes? How to start investing with an employee share schemeError in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Telegraph
a day ago
- Business
- Telegraph
Only tax inherited pensions worth more than £90k, Reeves urged
Savers with less than £90,000 in pensions would be spared from death taxes under proposals put forward to the Government. The Investing and Saving Alliance (Tisa), a lobby group representing hundreds of financial services companies, has urged the Chancellor to rethink plans to bring pensions into the inheritance tax system. In her maiden Budget, Rachel Reeves announced unspent pensions would be brought into the scope for inheritance tax from April 2027. The family of someone dying over the age of 75 would potentially see their inheritance reduced by death duties at 40pc, and then pay income tax on the remainder. In a report produced with Oxford Economics, Tisa suggested alternative ways to tax pensions and raise similar amounts of revenue without placing an 'additional burden' on grieving families. Under one proposal, families would pay no tax if the deceased's pension pots add up to less than £90,000. Over this threshold, the beneficiaries would pay income tax at their 'marginal' or highest rate. Dependants would be able to take the inherited pension as income over time, while non-dependants would have to take it as a lump sum. Currently, pensions are inherited entirely tax-free if the deceased is under the age of 75 – up to a limit of £1.07m. Under Tisa's second proposal, families would pay a flat tax rate on all unused pension funds over a certain threshold. It was suggested this could be a 25pc charge on pensions worth more than £150,000, 30pc over £200,000, or 35pc over £250,000. According to Oxford Economics' modelling, both proposals would raise about as much as the Government's inheritance tax raid. The reforms are expected to generate just over £1bn in revenue in the first year and £2bn annually after that. Tom Selby, of stockbroker AJ Bell, said inheritance tax was 'arguably the most complex, time-consuming way' of taxing pensions. He added: 'If the Treasury refuses to budge, it will be the bereaved families of people who have saved diligently all their lives who will be left to handle this administrative nightmare.' Under current plans, pensions will be included as part of an individual's estate for inheritance tax purposes from April 2027. The tax is charged at 40pc on the part of an estate worth more than £325,000 – or £500,000 if a homeowner leaves their main property to their children. Couples can share their allowances so they can potentially pass on £1m. The measures were announced in the Chancellor's October Budget, and a technical consultation was launched at the end of last year. But wealth managers and pension providers warn the new system could lead to widespread delays, with grieving families paying inheritance tax late through no fault of their own, and subsequently being hit with penalties by the taxman. Inheritance tax must be paid within six months, otherwise HM Revenue and Customs (HMRC) will start charging interest at 8.25pc. Andrew Tully, of the investment platform Nucleus, said: 'This complex process will cause bereaved families confusion and stress at a difficult time, and doesn't fit well with the support firms may want to provide people who are likely to be vulnerable following the death of a loved one. 'Most importantly, it will significantly slow down the payment of death benefits, and mean many beneficiaries will lose out financially after inheritance tax late payment interest penalties are levied.' Experts also warned the inheritance tax raid could ensnare far more families than predicted. According to government estimates, 10,500 estates which would previously have avoided the charge will now pay inheritance tax in 2027-28 because of the pension reforms. But the number of families caught out is likely to rise over the years due to rising house prices and frozen inheritance tax thresholds. Tisa's Renny Biggins said: 'The two alternatives we've set out offer a simple and proportionate approach, taxing beneficiaries on what they receive in a way that still discourages the use of pensions as a wealth transfer vehicle, but does not pull unused pensions into the complex inheritance tax system.'
