The Government says withdrawals from unsecured or alternatively secured pensions will be considered as income for inheritance tax purposes, offering new IHT planning opportunities for advisers.
HM Revenue & Customs has confirmed the rules in correspondence with Skandia. It had been unclear whether income from USP or Asp was considered as income or a mixture of income and capital for the purposes of the IHT exemption for normal expenditure out of income.
Skandia says this means clients who have excess income from USP or Asp can give it away, for example, to children or grandchildren, without incurring any IHT liability.
There is no need to survive gifts by seven years to avoid liability as they are exempt. On the death of the donor, a breakdown of expenses is required to prove their standard of living was not affected by the gifts.
Skandia head of tax and financial planning Colin Jelley says: “Advisers can now be clear on exactly where clients stand and make plans accordingly. The normal expenditure out of income exemption has no financial limit so advisers should consider whether its application would be relevant for clients.”