Proposal put forward to levy tax on pension assets exceeding £90,000, alternatively to the imposition of inheritance tax
The UK government's proposal to include unused pension funds within inheritance tax (IHT) from April 2027 has sparked debate, leading to the emergence of alternative approaches to address this issue. Here's a comparison of these alternatives with the current proposals:
## Current Inheritance Tax Raid Proposal
Starting from April 2027, unused pension savings will be included in the estate for IHT purposes, potentially leading to higher tax bills for beneficiaries. Beneficiaries may face a double tax whammy if they receive income from the pension after the age of 75: they'll pay income tax at their marginal rate and potentially face IHT on the pension amount above the nil-rate band of £325,000. However, there are some exceptions, such as transfers to a spouse or civil partner remaining IHT-free and charitable donations reducing the IHT rate.
## Alternative Approaches
1. **Remove Pensions from IHT Estate** - **Beneficiaries Taxed Directly**: Beneficiaries could be taxed on inherited pension funds at their marginal rate of income tax, or a flat "inheritable pension tax charge" could apply above a nil rate threshold. - **Advantages**: This approach simplifies tax rules and avoids delays in grieving families accessing funds. It ensures pensions remain outside the IHT regime, treating them differently due to their tax relief during accumulation.
2. **Excepted Group Life Schemes** - These are tax-efficient death in service benefits not using pension schemes. They avoid lifetime allowance issues but are not exempt from IHT and can lead to liabilities after the 10-year anniversary unless planned properly.
## Comparison
- **Complexity and Certainty**: The alternative approaches aim to reduce complexity and provide certainty for consumers by keeping pensions out of the IHT regime, simplifying tax obligations for beneficiaries. In contrast, the current proposal introduces more complexity by including pensions in the IHT estate. - **Tax Efficiency**: The alternative approaches focus on direct taxation of beneficiaries or flat tax charges, which can be simpler and more predictable than IHT calculations. Excepted group life schemes offer tax efficiency but require careful planning to avoid IHT issues. - **Government Revenue**: Both the current proposal and the alternatives aim to achieve similar fiscal outcomes for the government, though the alternatives focus on avoiding delays and confusion for beneficiaries.
Overall, the alternative approaches are designed to reduce the administrative burden and provide clearer tax rules for pension inheritances, while the current proposal aims to close perceived loopholes in inheritance planning using pensions. The debate continues as stakeholders consider the potential implications of these proposals for UK families and the financial sector.
- The debate surrounding the UK government's proposal to include unused pension funds in inheritance tax (IHT) has led to discussions about removing pensions from the IHT estate, with the option of beneficiaries being taxed directly at their marginal rate of income tax.
- Another alternative approach is the use of Excepted Group Life Schemes, which are tax-efficient death in service benefits not based on pension schemes, but they are not exempt from IHT and can lead to liabilities after the 10-year anniversary unless properly planned.
- The current IHT raid proposal, set to take effect from April 2027, includes unused pension savings in the estate for IHT purposes, potentially leading to higher tax bills for beneficiaries, who may also face a double tax whammy if they receive income from the pension after the age of 75.
- In comparing the alternatives with the current proposal, both aim to achieve similar fiscal outcomes for the government, but the alternatives focus on avoiding delays and confusion for beneficiaries by keeping pensions outside the IHT regime.
- Engaging in investing, whether it's in stocks, personal-finance, or business, requires a keen understanding of financial matters, such as the potential impact of inheritance tax on savings, pensions, and insurance, to ensure a secure and prosperous financial future.
