Individuals who delay taking there benefits due to ill health may be exempted from paying inheritance tax due on their pension pots, latest treasury documents reveal.
Current legislations mandate that inheritance tax is be chargeable if a person dies before withdrawing their pension funds. The IHT comes into effect if the individual is terminally ill and chooses not to draw on their funds or skips withdrawal at their designated age.
Section 3(3) of the Inheritance Tax Act 1984 holds a person liable for inheritance tax, if s/he fails to take pension benefits on her/his chosen date. However, the draft Finance Bill 2011 proposes to revoke the provision.
If a person is already member of a registered pension scheme or a qualifying non-UK pension scheme, come April 6, s/he will not be levied IHT if she chooses not to draw down on her pension fund or buy an annuity, HMRC confirmed.
IHT will be chargeable on lump sum payouts from non-registered and non-Qnup schemes upon death, HMRC clarified. Additionally, a new caveat has been introduced for members who know of their illness, from parking money in their pension pots to avoid taxation.
“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”, said Managing Director of Yellowtail Financial Planning.
Added Andy Tully – Manager of Senior Pensions Policy at Standard Life: “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”.