Treasury documents have revealed plans to abolish the inheritance tax levied on the pension pots of individuals in ill health who delay taking benefits.
Under current legislation, inheritance tax can be levied on pension assets if a person dies before drawing on their fund. This charge arises only if the individual is aware that they are in ill health and either chooses not to or omits to take pension benefits at their selected retirement age.
However, an amendment contained in the draft Finance Bill 2011 revokes the powers of section 3(3) of the Inheritance Tax Act 1984, which says a person could be liable for inheritance tax if they do not take pension benefits at their selected retirement age.
HMRC has confirmed that IHT will not be levied when a member chooses not to buy an annuity or draw down on their fund from April 6, provided they are in a registered pension scheme or a qualifying non-UK pension scheme.
However, it says IHT charges will continue to apply to lump sums paid out after death on non-registered and non-Qnup schemes. HMRC has also introduced a caveat to prevent a person who knows they are ill from shovelling money into their pension to avoid tax.
Standard Life senior pensions policy manager Andy Tully says: “This creates an advice opportunity because if you know your client is ill, you can advise them not to take their benefits so that 100 per cent can be paid out with no tax. It has taken away an area of confusion for advisers and given us an estate planning tool.”
Yellowtail Financial Planning managing director Dennis Hall says: “This is the right thing for the Government to do because people may not be drawing on their benefits because they are trying to protect beneficiaries, not because they do not want to pay tax.”