Chancellor announces new tax regime for inherited pensions

In his speech at the Conservative Party Conference last month George Osborne, the Chancellor of the Exchequer, noted that, even following his reform of the tax regime for pensions announced in this year’s Budget, ‘there are still rules that say you can’t pass on to the next generation any of your pension pot when you die, without paying a punitive 55% of it in tax.’  He went on to say that: ‘I could choose to cut this tax rate. Instead, I choose to abolish it altogether. People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free. 

Effective from 29 September 2014. The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down. Freedom for people’s pensions. A pension tax abolished. Passing on your pension tax free.’

Briefing notes were published by HM Treasury the same day. These stated that the new regime will apply ‘from April 2015.’ Possibly this can be reconciled with the Chancellor’s announcement by assuming that the new arrangements will apply where the individual dies on or after 29 September 2014 and the payment is made on or after 6 April 2015.

The Treasury notes indicate that, ‘from next year’, anyone in a drawdown arrangement or with uncrystallised pension funds will be able to nominate a beneficiary to inherit his pension savings.

If he then dies before attaining age 75, the beneficiary ‘will pay no tax on the money they withdraw from that pension, whether it is taken as a single lump sum, or accessed through drawdown.’

However, if he dies after attaining age 75, drawdown payments will be taxed as the beneficiary’s income. Lump sum payments will be taxed at 45% in 2015/16, but thereafter at the beneficiary’s marginal rate. This delay is to allow time for details of a tax deduction scheme to be worked out with pension providers.

Neither the Chancellor’s statement nor the Treasury briefing notes mention the Inheritance Tax position.