OK so there wasn’t anything that really made the eyes roll this time around, but there were some pleasant confirmations and a relaxation on ISA inheritance: (see also separate blog “The Chancellor’s Autumn Statement – the Taxy bits” for the more routine stuff)…
Flexible Pensions and Death Benefits confirmed.
These changes will have an increasing influence on the direction of estate planning, as their repercussions become more widely accepted.
On death before age 75, any death benefit will be paid tax free provided it is within the Lifetime Allowance (LTA). Thus there is no longer a distinction between “crystallised” and uncrystallised” pots for pre-75 death benefits.
On death at 75 and later, the remaining fund forms death benefits which are taxable on the recipient at his / her income tax rate, when they draw the funds.
Any individual beneficiary of a flexible pension can choose to keep their inherited pension pot in the drawdown wrapper and decide when (or if) they draw down on it. Inheritable Pensions! This IMHO puts pensions at the forefront of inheritance planning going forward.
Inheritability of ISAs
Previously, upon death of a married account holder, their ISA money would no longer carry ISA status in the hands of the inheriting spouse / civil partner. It now does, so the surviving spouse has the benefit of continuance of that tax-free savings wrapper . This only applies to spouses (spice?) or civil partners however, other beneficiaries will receive the money without ISA status.
Whilst inheriting ISA funds from your spouse is free of inheritance tax (because of the spouse exemption) it is still going to be taxable as part of the estate on second death. So there can be instances where individuals (who are near to or already over age 55) can find it to their advantage to use a personal pension contract to receive their ISA funds:
- You need earnings to qualify for tax relief on the contributions (although you can contribute a small sum without earnings – £2,880 p.a. net).
- you can still withdraw the funds from the pension (if 55 or above)
- you (usually) end up with more cash net of tax
- the death benefits are the whole fund is payable tax free on death pre-75
- the death benefits can be directed into a discretionary trust if you prefer (spouse bypass trust)
Single Lifetime IHT Settlement nil rate band
This idea has been dropped (sigh of relief there). The idea of just a single IHT nil rate band for lifetime settlements, i.e. allowing only £325,000 to be gifted in one’s lifetime and allocated across all relevant property trusts they created, has been axed. For the time being at least, the £325k rate will re-set every seven years as before. However there is still likely to be a simplification of periodic and exit IHT tax charges on trusts, to stop people taking advantage of the rule in “Rysaffe” where multiple trusts reduce the overall tax bill.