HMRC Threat to Stop Inheriting Pensions Tax Free

On the 18^th July 2023, HMRC released a new consultion paper on the taxation of pensions.  This is a carry over from George Osborne’s Taxation of Pensions Review that was shelved after the Brexit vote in 2016.

The consultation reseurrects this and whilst many may not know, Pensions are governed by ‘enabling’ acts.  This means that HMRC can change pension taxation without it passing through Parliament under a new act or statute.

Osborne’s main thrust was to explore the removal of the lifetime allowance but also to allow pensions to be inherited tax free if death occurs before age 75.  The ability to inherit pensions tax free was implmented but thre is a balance to be struck here with the removal of the lifetime allowance now confirmed in Jeremy Hunt’s Spring Budget from April 2024 and for now a 0% tax charge if you exceed the allowance.

Ths issue beiog that now, this means that all pensions, and in the millions, irrespective of size given ths lifetime allowance 0% charge and its removal in 2024 will benefit the fortunate ones with larger pensions.

Comment

The warning offered by consultancy Lane Clark Peacock is that HMRC is exploring the taxation of all pension funds, even if you have not touched them, on death.  Given that tax relief is granted when you and your employer pays into pensions, there has to be a revenue collection somwhere.  This would likely mean that HMRC is looking to make all inherited pensions subject to the income tax rate of the beneficiary (including death before age 75), just in the same way that inherited pensions on death after age 75 are taxable on the beneficiary’s income tax rates.

We suggest this is fair enough.  The pension member pays income tax when they drawdown or annuitise the taxable part (75%) of a pension fund so why should beneficiaries on death not pay tax when they draw the same pension fund.

Given the ‘enabling’ Act, this could be implemented as early as April 2024 given that no change in tax law is required,