Latest news with #pension pots
Daily Mail
4 days ago
- Business
- Daily Mail
Could I give £250 gifts to 400 people who then pay them to my daughters to beat inheritance tax on £100,000?
I am one of the people that will be adversely affected by Rachel Reeves' unwarranted raid on unused pension pots. Currently, this change will mean an additional inheritance tax charge of about £270,000 for me, if I died. I have been looking at the gifting rules and the sums you can give away are measly, £3,000 each year, or unlimited £250 gifts but only one per person. However, if I can gift £250 free of IHT to as many people as I wish, could I do that and then those people all give the money to my two daughters? So, could I gift a total of £100,000 to 400 different people and they each in turn make £250 gifts to my daughters, giving them £50,000 each and thus avoiding inheritance tax? R.J, via email Harvey Dorset, of This is Money, replies: Recent changes mean that considerably more people are in line to incur inheritance tax bills on their estates in the years to come. Pensions are set to fall into the inheritance tax net from 2027, meaning that many will find their estate is worth well above the inheritance tax allowance. Inheritance tax receipts recently increased to £8.2billion from April 2024 to March 2025, more than £800million higher than the same period a year before. One of the main ways to go about reducing a potential IHT bill is to make the most of gifting allowances to lower the value of your estate. However, the current gifting allowances have been in place since the mid 1980s, with a maximum total annual inheritance tax-free gift limit of £3,000. This has made it all the harder to meaningfully reduce the size of an estate by using this allowance. On top of the £3,000 annual allowance, which can only be given to one recipient, the rules stipulate that you can give as many £250 gifts to whomever you like. This is where your novel solution comes in. If you can find 400 willing participants – something I dare say you might have trouble with – why can't you give them each £250 to then gift to your two daughters? Unfortunately, as David Denton, tax expert at Quilter Cheviot, discusses below, you might not have found the genius solution that you might think. Luckily though, there are other options that might be available to help you pass your wealth to your two daughters. David Denton, tax expert at Quilter Cheviot, replies: As the tax burden hits a recent high and rumours swirl of more tax rises to come, it is understandable that consumers may wish to find ways to reduce their tax bill. However, the tax authorities are rightly switched on to the potential for abuse of the system and people finding what they think to be new and novel ways to avoid tax. Some may be legitimate but for the vast majority they are likely to cause more problems than it is worth. The UK introduced the 'General Anti–Abuse Rule' (GAAR) in 2013 and this is designed to target those taxpayers who avoid paying tax in ways that are not in the spirit of the rules, despite some aspects being potentially legal. Abusive arrangements can include as a series of pre–ordained steps, where HMRC would look at the overall effect of the series or combination of transactions in order to identify the real purpose. The GAAR applies to a number of personal taxes, including inheritance tax, so if enough tax was at risk, it could come into effect here given there is a pre–planned element and involves a number of people. Instead you should be looking at how they can use the rules to still make substantial gifts. For example, should you expect to live for another seven years then it may be worth making a gift above the £3,000 limit as a potentially exempt transfer. After seven years of being gifted these assets will no longer be taken into account on death and be free from inheritance tax. There are other possibilities for exempt gifts, such as marriage gifts, which can be up to £5000, according to the relationship between the donor and recipient. Finally there is also the option of making gifts out of surplus income, where the gift is part of your normal expenditure and leaves you able to maintain your usual standard of living. These gifts can come from salary, dividends, pension income or rental income, so it does give you some options that are very much within the rules of the UK tax system.
Times
23-07-2025
- Business
- Times
The inheritance tax raid on pensions will pile misery on grieving families
Coping with the loss of a loved one is hard enough, without the stress of sorting out their financial affairs. But government changes are about to make the whole process a lot more painful. In October 2024, the chancellor said that from April 2027, unspent pension pots would be counted as part of your estate for inheritance tax purposes. At the moment, money left in a pension can be passed on free of inheritance tax, but the government took the view that pensions were too often being used to avoid tax when you die, rather than simply providing for your retirement. • Families face red tape nightmare over inheritance tax on pensions The original proposal was that, in the future, the executor (or other person winding up the estate) would have to contact all the pension firms of the person who had died, find out how much money was left in each, work out how much inheritance tax was due from each, and then send this information to each pension company. Many pension firms expressed concern about all of this, not least the risk that they would face penalties for not paying inheritance tax within six months of the death, even if they had not been notified about the death until months afterwards. In response, HM Revenue & Customs this week made changes that will ease the burden on pension firms — but put more on to grieving families. Instead of the pension schemes being responsible for ensuring that inheritance tax on the pension assets is paid, the executor of your estate will now be responsible. HMRC has set out a 'five step' process that executors will have to go through. This includes finding and contacting pension firms, asking them about the size of any pension pots and who the beneficiaries are, and dealing with those beneficiaries to make sure that they pay the tax due on their share of the estate. Only once all of this has been done can the executor apply for probate and deal with the rest of theestate. The whole process of winding up financial affairs could still be going on a year or more after someone's death. • Will you pay the price for the chancellor's pension shake-up? HMRC said that most estates do not pay inheritance tax and that if the only beneficiary of a pension is a spouse, then inheritance tax does not apply in any case. But the executor will only know who the beneficiaries are once they have contacted all the pension firms, and all of this will take time. There could also be delays where a pension scheme's trustees have 'discretion' over who gets the money, and until the trustees have all the information that they need to reach a decision it will not be possible to finalise the inheritance tax position. There will also be new complexities for the beneficiaries of the pensions. Under the new rules, the person benefiting from a pension can be paid the full amount from the pension and then pay the inheritance tax due on it. But you also have to pay income tax on inherited pensions, so by the time they get the inheritance they are likely to have paid income tax on the full amount. There will now be a process for such people to claim an income tax refund on the part of the bequest that they never really benefited from, because it was paid on to HMRC in inheritance tax. It is simple for a chancellor to say that pensions should not be used as an inheritance tax loophole, to close the loophole, bank the proceeds and move on. But for tens of thousands of grieving families every year, they will not be able to move on. They will instead be faced with many months of additional bureaucracy that will make the process of bereavement all the more painful to Webb was the pensions minister from 2010-2015 and is now a partner at the pensions consultancy LCP
Daily Mail
22-07-2025
- Business
- Daily Mail
Tax hit on inherited pensions confirmed for 2027 - and families will be landed with the red tape
Bereaved families rather than pension firms will be responsible for working out and paying inheritance tax on retirement pots from 2027, the Government has announced. It confirmed plans to go ahead with a 'double tax hit' on inherited pensions, but has spared pension scheme administrators from making deductions and payments direct to the taxman. Initially it planned to require pension schemes to deal with this red tape before paying the balance of the pension to an estate, but its change of heart means executors and administrators will have to do this work. In another key change, it has exempted all 'death in service' benefits from the inheritance tax changes following an outcry - including from unions representing workers such as firefighters. The Government announced in last year's Budget that money remaining in pension pots is going to become liable for inheritance tax like other assets, such as property, savings and investments, in two years' time. But critics say some wealthy families could be taxed twice. If a saver is aged over 75 when they die, their beneficiaries are still going to have to pay their normal income tax rate of 20 per cent, 40 per cent or 45 per cent on pension withdrawals too. For a 45 per cent taxpayer this represents a 67 per cent tax rate, and the tapering of the residence nil rate band down to nothing on estates worth £2million-plus would mean an effective tax rate of 70.5 per cent. Retirement pots can be passed on free of income tax when someone dies before age 75. > How much is inheritance tax and who pays? Find out below How will inheritance tax be levied on pensions? The Government originally intended pension scheme administrators rather than 'personal representatives' - executors and administrators - to be liable for the reporting and payment of any inheritance tax on pensions. But it heard protests that this would bring inherited pensions in estates with no IHT liability into the process unnecessarily, and lead to delays in paying out funds to beneficiaries. Also, schemes would probably make payments on account of the maximum possible amount of inheritance tax - 40 per cent of the value of any unused funds - to avoid late payment interest charges after the six months deadline. Families would then have to sort this out afterwards. The Government therefore decided to make personal representatives, who are already responsible for administering the rest of the estate, liable for reporting and paying any inheritance tax due on pensions and death benefits. Meanwhile, it will take separate steps to deal with the 'small number' of estates that will not have sufficient liquid funds to pay the inheritance tax due on the pensions. Regarding its decision to keep death in service benefits out of IHT after all, the Government admitted to 'inconsistencies' in the initial plans, which 'would not be consistent with the broader rationale of ending the use of pensions as a tax planning vehicle'. What will this mean for bereaved families? 'Life is tough enough when you have just lost a loved one without having extra layers of bureaucracy on top,' says former Pensions Minister Steve Webb, who is now a partner at pension consultant LCP. 'In future, the person dealing with the estate will need to track down all of the pensions held by the deceased which may have any balances in them, contact the schemes, collate all the information and put it into an online calculator and then work out and pay the inheritance tax bill.' Webb points out all of this will have to be done before a probate application can be made - meaning executors and administrators will not yet have access to the funds in an estate - potentially slowing down the winding up process substantially. 'Complications will no doubt arise where the family member cannot track down all of the deceased person's pensions or where providers are slow to supply the information needed to work out the inheritance tax bill.' Webb, who is This is Money's pensions columnist, adds: 'His Majesty's Revenue and Customs will have to give serious thought to the penalty rules around late payment of IHT to ensure that grieving families are not at risk of fines in cases where delays in resolving matters relating to pensions are not under their control. 'Whilst the changes HMRC has made are undoubtedly good news for pension schemes and those who administer them, it is hard to see that they are good news for bereaved families,' says Webb. How long do you have to pay inheritance tax? You get just six months, kicking off from the last day of the month after a loved one's death, to add up their assets, calculate what is owed and hand over any money due to the taxman. If you are late, you will be charged interest on the unpaid tax - it is currently 8.25 per cent a year. If no money is due, you get 12 months leeway to simply fill in the forms to show nothing is owed. But you will need to settle this issue one way or another with HMRC, if you need to get probate to gain control of the deceased person's funds - it won't be granted without the taxman's official sign-off. > Read a 12-step guide to working out and paying inheritance tax Bringing unused pensions into the ambit of inheritance tax is a 'seismic shift' in how we think about and plan for retirement and estate planning, according to Quilter pensions specialist Roddy Munro. 'Without further amendments, how the policy is eventually enacted risks turning a targeted tax reform into an administrative minefield,' he says. 'What we could end up seeing is a massive transfer of private wealth back to the state. 'What's more, while only a small fraction of estates will pay more tax, a far greater number will face needless complexity, delays, and stress – often at the worst possible time.' Craig Rickman, pensions expert at Interactive Investor, welcomes confirmation that inheritance tax won't be levied on death in service benefits. But he adds: 'The proposals entering draft legislation remain fraught with issues, risking lengthy probate delays and additional costs, which may cause unnecessary distress to grieving family members. 'Consumers are already altering their behaviour ahead of April 2027, in some cases making pension withdrawals sooner than previously intended in fear of loved ones being hit with exorbitant tax bills and facing an administrative maelstrom. 'This could not only lead to poorer outcomes in retirement, but damage trust and confidence in a pension system that is already on shaky ground. 'Furthermore, savers might be extracting and passing on money from their pensions that they need to meet future financial responsibilities, such as to cover the cost of care.' Pete Maddern, managing director for retirement at Canada Life, says there would have been unintended consequences with making pension scheme administrators responsible for paying inheritance tax on pension funds and death benefits. 'Aligning with the existing process will help ensure that beneficiaries receive what they are owed without delay and mean that unnecessary burdens aren't placed on personal representatives and families at an already difficult time.' Regarding death-in-service payments, he says: 'These benefits provide a critical short-term financial lifeline for loved ones following the death of a working-age earner. 'Including them in the scope of the changes risked much wider repercussions not only for grieving families, but also for the employers that provide these benefits for their workforce.' How much is inheritance tax and who pays? Inheritance tax is levied at 40 per cent on estates above a certain size. You need to be worth £325,000 if you are single, or £650,000 jointly if you are married or in a civil partnership, for your loved ones to have to stump up inheritance tax. A further allowance, the residence nil rate band, increases the threshold by £175,000 each - so £350,000 for a married couple - for those who leave their home to direct descendants. This creates a potential maximum joint inheritance tax-free total of £1million. This own home allowance starts being removed once an estate reaches £2million, at a rate of £1 for every £2 above the threshold. It vanishes completely by £2.3million. Chancellor Rachel Reeves said in the Budget these thresholds will be frozen until 2030.
Telegraph
10-07-2025
- Health
- Telegraph
Streeting opens way for doctors to top up pay with pensions
Wes Streeting has opened the door to cutting junior doctors' pension pots in order to raise their pay. The Health Secretary said he would discuss the policy to avert a new round of strikes that threaten to derail his landmark 10-year plan to fix the NHS. The medics, now known as resident doctors, will walk out for five days later this month in an attempt to secure a 29 per cent pay rise – months after receiving a 22 per cent boost. Downing Street on Tuesday said negotiations over pay were off the table, but Mr Streeting has suggested there could be a 'discussion' about forfeiting future state pensions in exchange for pay now. Doctors are among the public sector workers eligible for lucrative, gold-plated pensions, costing the Treasury billions of pounds each month. The Cabinet Office is understood to be considering proposals to increase pay in exchange for the Government making lower pension contributions, following an increase in workers opting out of employer pension schemes. Mr Streeting said: 'We've got this situation where the pension pot is so big that consultants lobby us to change the tax rules. 'They're taxed so heavily on the pensions because they're that valuable that they say, 'I might as well not bother working, my pension's so valuable'.' Speaking to LBC, he added: 'If the BMA want to come to me and say, 'Do you know what? Given that challenge, we would rather have a slightly less generous pension in order to have higher pay today', those are the sorts of issues you can get into in a discussion.' NHS pensions include a threshold which restricts the amount of tax-free pension growth allowed each year. It means doctors could be penalised for taking on extra work such as through initiatives to clear the backlog if they breach that amount, triggering a high rate increase in taxation that the BMA says would mean 'they are paying to work'. While the impact on pay depends on the year compared to and the inflation measure used – the BMA uses the retail price index (RPI) instead of the industry-standard consumer price index (CPI) – there is less debate about the size of doctors' pensions. They are often worth about 75 per cent of doctors' salaries in retirement and guaranteed to rise with inflation each year. Doctors enjoy index-linked, taxpayer-funded, 'defined benefit' schemes, many of which pay a proportion of the recipient's final salary from the day they retire. Under the NHS scheme, staff contribute between 5.2 per cent and 12.5 per cent of their salaries, while the state contributes 23.7 per cent each year, far outpacing most private sector arrangements. As a result, the NHS is paying out nearly £1 billion a month in staff pensions, with almost 2,000 staff receiving pensions of over £100,000 annually – a figure that has more than doubled in a year – although this includes all staff, not just doctors. Someone who started as a junior doctor eight years ago on a starting salary of about £27,000 will have already built up an annual pension of more than £8,000. A first-year resident doctor today will earn a starting salary of around £39,000 as a result of recent pay rises. The median pension claimed by GPs was £53,300 a year in 2023-24 and £40,090 for hospital doctors, according to a report by the government's pay review body on doctors and dentists. The BMA's junior doctors' committee are demanding a 29.2 per cent increase to their base pay, despite having received 5.4 per cent on average this year – more than any other public sector worker for the second year in a row. The union claims this is necessary because of real-terms cuts to doctors' pay dating back to 2008. The walkout later this month could mean more than 200,000 appointments are cancelled, based on data from previous strikes. The strike could endanger the success of Mr Streeting's 10-year plan to save the health service, which he announced last week with promises to 'bring down devastating hospital waiting lists'. Figures published on Thursday revealed the NHS waiting list had fallen to 7.36 million, just 260,000 fewer than when Labour came into power. Mr Streeting urged the BMA to abandon its walkout, saying that doctors' strikes 'ruin lives' and could lead to job cuts. He said public support for the BMA has 'collapsed' and that strikes would jeopardise the NHS's 'fragile' recovery. Ed Argar, the shadow health secretary, said Labour was paying the price for 'caving into union demands for above inflation pay rises without any conditions or strings attached'. He said: 'Labour's weakness is sadly fuelling this crisis. If they don't get a grip now, a summer of discontent and strikes risks turning into a summer of chaos, and it will be patients that pay the price.'
