Updates

Amendments to the 2nd Edition Text, since 12 March 2024

The Intestacy Rules (page 29)

While the definition of ‘children’ includes legally adopted children, it does not extend to step-children.

For brothers and sisters to inherit, they must share both parents with the deceased: ‘half-blood’ siblings do not qualify. 

Pensions (pages 55 and 56)

The text is slightly amended as follows:

The first thing to say is that the pensions regime is horribly complex and that this is a VERY bare summary on which you should not rely: professional advice is essential. Note the warning on page 8.

On your death you may have a prospective entitlement either under a defined benefit pension (for example, a final salary pension), to which you and your employer have been contributing, or under a money purchase pension (for example, a personal pension, such as a Self-Invested Personal Pension or SIPP). In either case you should consider what will happen on your death.

With a defined benefit pension which you haven’t yet started to access, what happens in terms of procedure and so tax implications rather depends on the pension provider’s own rules, which you should try to find out, in particular, because they may override your wishes. The pension provided will certainly want to have a copy of your up-to-date Will. And you should also let them have a specific nomination of your chosen recipient(s) of any amounts payable after your death.

With a money purchase pension, you should nominate your chosen recipient(s) to the pension provider, though this will not be binding. The value on death irrespective of age will normally pass free of Inheritance Tax (subject to one rare exception). There is a big difference between dying under the age of 75 and having attained at least age 75. If you die aged under 75, the recipients (as designated by the pension provider) can draw the fund value at any time, free from any Income Tax (or Capital Gains Tax) also. However, note that the freedom from Income Tax depends upon (a) payment made within two years after the scheme administrator first knew (or could reasonably have been expected to know) of your death; and (b) upon the fund value being less than the lifetime allowance (or higher protected amount) – see page 56. If you die aged at least 75, while there will still be no Inheritance Tax liability (subject to that rare one exception), the withdrawal of funds from the scheme will attract Income Tax in the recipient’s hands at their marginal rate.  

Interestingly, if you have no dependants, the trustees can pay a lump sum death benefit out of pension funds whether uncrystallised or in drawdown to a charity nominated by you without using up or being limited by your lifetime allowance (see below). While it may be sensible in financial terms for the value to go to a surviving spouse/civil partner, this rather ‘wastes’ the Inheritance Tax exemption (unless the whole remaining fund will have been spent by the second death). It all depends on your respective ages and states of health, on your overall financial circumstances and on the value of the pension fund within that. If you want your surviving spouse/ civil partner to have access to the pension fund after your death, there may be a case for transferring the value to an outside settlement already established for the purpose, where under current rules the Inheritance Tax liability would be limited to 6% at most every ten years – and the rate may be much less than that.

Alternatively, you might have started drawing on your pension by the time you die, whether defined benefit or money purchase. If defined benefit, again the position will depend on the pension provider’s specific rules. Under a money purchase arrangement, the income will be being paid to you either as an annuity or by drawdown.  If by drawdown, the pension fund remaining on death can be transferred to any nominated beneficiary, whether spouse/civil partner or children. For purposes of the lifetime allowance any inherited pension can be held alongside their own, without eating into it. As above, if you die before age 75, there will generally be no Inheritance Tax liability, though there could be Income Tax to pay if the amount exceeds your own lifetime allowance (unless already tested by a pre-6 April 2024 crystallisation). If after age 75, there is no lifetime allowance and any withdrawals from the inherited pension fund will attract Income Tax for the recipient. The standard lifetime allowance was £1,073,100 in 2022/23 and 2023/24 (although some savers have locked into higher amounts).

Very significant changes to the pensions regime were made by Finance (No2) Act 2023, including abolition of the lifetime allowance (though it does continue for some purposes). Further substantial changes will take effect from 6 April 2024: see the Updates tab on the website for developments here.

Pensions: changes from 6 April 2024 under Finance Act 2024

The very substantial changes made (on which HMRC have issued some guidance) are beyond the scope of this book.  Again, I emphasise the importance of getting proper professional advice.  The only point to mention in the present context is that the amount which may be liable to Income Tax on beneficiaries following the pension-holder’s death under 75 will depend on whether the fund went into drawdown before 6 April or after 5 April 2024.  If before 6 April, there will generally not be an Income Tax charge (since the allowance will have already been tested on crystallisation).  If after 5 April, the amount of a lump sum paid out which exceeds the deceased member’s available allowance (standardly £1,073,100, subject to having locked into a higher amount) will be subject to Income Tax at the recipient’s marginal rate.  Otherwise, the position is much as described on pages 55 – 56.

Inheritance Tax – The General Rule on Death (page 65)

Paragraph 2 last sentence: replace as follows:

The chargeable estate on death includes any ‘failed’ potentially exempt transfers, that is gifts which the donor fails to survive by seven years (see page 66).  Where the gift exceeded the nil-rate band of £325,000 and more than three years have passed since the date of the gift, ‘tapering relief’ applies to reduce the rate of tax charged.

Inheritance Tax (page 68)

Add new section at the foot of the page:

Budget 30 October 2024

Watch out for any changes to the Inheritance Tax regime proposed by Chancellor of the Exchequer Rachel Reeves.

Appendix 7

SOME USEFUL RESOURCES

Books

Ritchie, Stuart, ’Who Will Get My Money When I Die?’  Rethink Press, 2024

Subtitled ‘The Concise Guide to Making Your Will and Reducing The Impact of Inheritance Tax on Your Estate’, this is a significant addition to the existing literature on the subject.  Drawn on Stuart Ritchie’s extensive experience and advising a wide-range of clients (with lots of helpful real life examples), the book is a clear guide to mitigating potential Inheritance Tax liabilities, while planning for possible needs in old age and in case of ill-health.  The book includes useful guidance on choosing executors and how to decide what to put in a Will.

Websites

End of Life planning – www.endoflifematters.co

Ann Kenrick OBE, former Master/CEO of the Charterhouse charity which supports older people in need, provides support and guidance to individuals and groups to get their affairs in order and plans in place. Whatever your situation – young, older, or, like most of her clients, somewhere in the middle – you will receive personalised, creative and empathetic support relating to your particular life context. Ann also runs free Death Cafés and practical, interactive workshops for community groups and corporates.

INDEX (page 112)

Add Domicile 65, 68