This is timely. Thanks Christopher.
You can download the PDF produced by HMRC from here. Press the dark grey ribbon at the bottom to get read here. You can download it using this link
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This is timely. Thanks Christopher.
You can download the PDF produced by HMRC from here. Press the dark grey ribbon at the bottom to get read here. You can download it using this link
A note for those who plan with individuals; by that I mean real people not failing everyone apart from Mr Average.
It seems that rather than encourage the greater use of pensions to deal with income beyond work either in your own “pot” or in a collective big “pot”. This has encouraged taking benefits earlier than intended (especially in the next 9 weeks) with the objective of making gifts under the normal expenditure regime. Suffering one tax charge (45%) on the family savings is an improvement on 67%. Is this 1984 exemption to be closed down in the budget?
Just to summarise what “normal” means
Three Conditions for Exemption
To qualify for the Normal Expenditure Out of Income exemption, a gift/disposal must satisfy three criteria:
1 It formed part of the transferor’s normal expenditure.
2) It was made out of income (taking one year with another).
3) It left the transferor with enough remaining income to maintain their normal standard of living.
Key Factors in Determining “Normal”
Subjective Standard: “Normal” means typical or habitual for the specific transferor, not for the average person.
HMRC Assessment Criteria: HMRC considers frequency, amount, nature of the gifts, identity of the recipients, and the underlying reasons for making the gift.
Documentation:
Documentary evidence of intent and record-keeping is critical.
Patterns of Giving & One-Off Gifts
Time Span for a Pattern: There is no strict legal timeframe, but HMRC typically considers 3 to 4 years sufficient to establish a pattern of regular giving.
One-Off / Single Gifts: A single gift can qualify if there is clear evidence it was intended to be the first in a regular pattern.
Example: Paying the first premium on a whole-of-life insurance policy shortly before dying.
Gifts Near Death: If a single gift is made close to death, HMRC requires strong proof of a genuine intent and realistic expectation to continue making further payments.
Gift Amounts & Variations
Size Comparability: Gifts should generally be comparable in size.
Acceptable Variations: HMRC allows variances in gift amounts if they are tied to:
Variable Income: e.g., fluctuating annual share dividends.
Specific Costs: e.g., grand-children’s school fees that increase over time.
A helpful book just published on the subject However it may need revision at the end of October. Here is the review this is an excellent source of practical value:
From 6 April 2027, unused pension funds on death will generally be subject to IHT. In this article, we précis the coverage of this important topic as written by John Woolley and Marcia Banner in Financial Planning with Trusts from Claritax Books.
Overview
Broadly, the main impact of the provisions is that, on the pension member’s death after 5 April 2027, the value of the member’s defined contribution pension schemes or other death benefits payable from the schemes at the date of the member’s death will be added to the value of the deceased’s free estate in order to calculate IHT liabilities.
Any allowances, such as the available nil-rate band, will be apportioned between the free estate and the pension schemes based on their respective values.
Where pension scheme assets are directly or indirectly left to a surviving spouse or civil partner, the IHT spouse exemption will apply and this could defer the payment of IHT on any remaining pension assets until the spouse’s subsequent death. There are also exemptions for amounts left to charity, though the authors of the book explore the complications that can arise where the 10% IHT reduction is in play.
Scope
The provisions will apply broadly to all unused pension funds on death, but with some exclusions. The main impact will be on defined contribution schemes. The new rules will not apply to employer-financed retirement benefits scheme (EFRBS) which are subject to other IHT provisions.
There are important categories of excluded benefits, and the position of annuities is complex. As the authors explain, there is a distinction between a pension annuity that continues to a dependant and a protected annuity that has residual value on death.
Personal representatives
The unused pension fund on death and/or death benefits will be treated for IHT purposes as an asset of the deceased’s estate, called the “notional pension property”.
Having been informed of the death, the pension scheme administrators (PSAs) will need to share information with the legal personal representatives (PRs) so that they can calculate the IHT payable. To do this, the standard nil-rate band or bands will be apportioned between the free estate and the pension value.
The PRs will have primary liability for the IHT but the PSAs can become liable in certain circumstances, and the authors explore the practical consequences for all parties of the interaction between the PRs and PSAs. The PRs can serve a withholding notice on the PSAs to retain certain amounts for up to 15 months. PRs will also be able to apply for HMRC clearance in certain circumstances.
Despite certain relaxations, the introduction of IHT on unused pension funds for deaths after 5 April 2027 will significantly add to the administration of an estate for PRs. In light of this, many non-professionals nominated as executors of individuals with pension assets may decide not to accept their position.
Payment of IHT
The beneficiaries may direct the PSAs to pay the IHT (new IHTA 1984, s. 226B).
Where benefits are vested in beneficiaries, they can voluntarily pay the IHT on the pension fund direct to HMRC.
Beneficiaries can also be required to reimburse the PRs for the IHT they have paid on the pension fund on the beneficiary’s behalf.
Where beneficiaries pay IHT out of death benefits that are also subject to income tax, the IHT paid will be a credit against the amount chargeable to income tax and may mean that income tax can be recovered.
Other points of practice
The addition of pension death benefits to the value of a deceased’s estate is likely to bring a significant number of estates into the IHT net. Estates already facing an IHT charge on death may face significantly higher IHT liabilities where death occurs after 5 April 2027.
The changes may well drag in estates at the “lower end” where it might have been thought that an IHT liability would never arise – for example, a divorced parent owning a property. Where individuals die intestate, the existing problems will only be exacerbated by the inclusion of pension death benefits.
Double taxation
For deaths on or after 6 April 2027, there is a very real possibility of double taxation, in the shape of the imposition of income tax on the net pension fund death benefits after it has already suffered IHT.
In the wrong type of situation, the provisions can give rise to total tax liabilities on lump sum death benefits of up to 76% on that part of the benefits that cause the recipient to lose the income tax personal allowance. An even higher liability can arise if the pension benefits cause the deceased’s estate to exceed £2 million with a consequent abatement of the residence nil-rate band. The imposition of a high income child benefit charge could further increase total tax liabilities.
Further guidance
The above summary has been produced by the Claritax editors from Financial Planning with Trusts, as updated by the authors to reflect FA 2026 changes. The authors address in depth such issues as:
identifying included and excluded pension benefits;
calculating and apportioning the IHT;
dealing with PR and PSA responsibilities;
funding and paying the tax;
managing the IHT / income tax interaction;
reviewing expressions of wishes and existing planning; and
planning opportunities before April 2027.
The complete analysis is available in Financial Planning with Trusts, on the Claritax platform for £12 per month, including all updates, on a 12-month subscription.