Budget Notes

BN45 PENSION SAVINGS AND INHERITANCE TAX

Who is likely to be affected?

1. Pension scheme providers, pension scheme administrators, members of pension schemes, insurance companies and financial advisers.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to:

•    ensure that tax-relieved pension savings diverted into inheritance using scheme pensions and lifetime annuities are subject to unauthorised payment tax charges and, where appropriate, inheritance tax (IHT); and

•    restore IHT protection to savings in overseas pension schemes.

3. This measure was announced at the 2007 Pre-Budget Report (PBR). Draft legislation for the measure was published at that time, to which there have been minor amendments.

Operative date

4. Operative dates are outlined for the various measures in the paragraphs below.

Current law and proposed revisions

Inheriting tax-relieved pension savings

5. Finance Bill 2008 will include provisions to implement the proposals on scheme pensions and annuities. Details of this are set out in PBR Note 15 and the subsequent changes are set out below.

6. The rules preventing unused tax-relieved funds being passed as increased pensions after death to other family members, other than dependants, do not currently have effect for schemes where there are 20 or more members and all members have their rights increased at the same rate. A change to the draft legislation published at PBR will ensure that the unauthorised payment charges and IHT will not have effect so long as there are at least 20 scheme members, who have their rights increased at the same rate because another member has died. This will have effect in relation to a member who dies on or after 6 April 2008.

7. Finance Bill 2008 will also provide that an IHT charge will arise as a result of an unauthorised lump sum payment in respect of a pension scheme member who dies aged 75 or older and who was in receipt of an annuity or scheme pension. Any IHT nil-rate band that has not already been set against the estate of the deceased may be set against this IHT charge. A change will be made to the draft legislation published at PBR to provide for the situation where the estate has not used all of the nil-rate band and more than one of the IHT charges in respect of a scheme pension or an annuity arises. This will ensure that the remaining nil-rate band can be used only once against the IHT charges. The measure, including this change, will have effect when the member dies on or after 6 April 2008.

8. Sections 151A to 151C of the Inheritance Tax Act 1984 (IHTA) give effect to similar provisions on 'alternatively secured pension' (ASP) funds to those set out in paragraph 7 above. Again, any nil-rate band that has not been set against the estate may be set against the IHT charges on ASP funds. To bring these provisions into line with those for scheme pensions and annuities, Finance Bill 2008 will ensure that any remaining nil-rate band may be used only once against the IHT charges arising on ASP funds. This change will have effect when a member dies on or after 6 April 2008.

Inheritance tax on overseas pension schemes

9. PBR Note 14 sets out details of changes that will be made to restore IHT protection to UK tax-relieved pension savings in overseas pension schemes. The provisions in Finance Bill 2008 will give IHT protection to pension savings which have had UK tax relief and also to all savings in certain overseas pension schemes. The IHT protection will apply to funds in overseas pension schemes that are tax-recognised and regulated in the country in which they are established. Or, if there is no system for tax recognition or regulation in that country, then the funds must be used to provide a pension income for life.

10. The change to the IHT rules for overseas pension schemes will have effect on or after 6 April 2006.

Further advice

11. If you have any questions about the IHT changes in paragraphs 6 to 10 above, please contact the Inheritance Tax & Probate Helpline on 0845 3020900. If you have any questions about the other pensions change in paragraph 6 above, please contact the Pensions Helpline on 0845 600 2622. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk