As you know SIPPs may be liable for Inheritance tax of 40% from 6th April 2027. Will beneficiaries be able to retain the passed over SIPP after paying 40% inheritance tax?

Say, if I specify in my will that my SIPP is to be divided into four beneficiaries, can all four beneficiaries keep the investment under their own SIPP after paying 40% inheritance tax? Of course, they will pay income tax after they withdraw money from the passed over SIPP. Is this possible?

Ashwani 

Rachel Vahey, AJ Bell Head of Public Policy, says:

It seems inevitable that IHT (inheritance tax) will apply to any unused pensions on death after 6 April 2027. HMRC recently shared more information on how they see this working in practice, although many unanswered questions remain.

It’s important to remember, that although pensions will be brought into the estate when working out how much (if any) IHT is due, they won’t always have to be paid to the people set out by the will.

At the moment, most pension schemes pay death benefits under the trustees ‘discretion’. This means the trustees of the pension, most pensions are set up under trusts or trust-like structures, decide who should inherit the pension. The pension saver can complete a nomination or expression of wish form saying who they would like the pension to go to, but the trustees have the final decision.

So, the pension won’t necessarily be paid to the same people who will receive assets through the will.

EXECUTORS ARE RESPONSIBLE FOR WORKING OUT IHT DUE

When the pension saver dies, the executors of their will or personal representatives are responsible for working out what, if any, IHT is due. The personal representatives usually have to pay the full IHT and can do so using other assets in the estate – for example a bank account.

Once the IHT position has been finalised they will tell the pension scheme, and the pension scheme will then pay out the pension benefits to the pension beneficiaries. If the personal representatives pay the IHT, no IHT will be deducted from the pension before it’s passed to the beneficiary.

The beneficiary can take the pension either as a lump sum or they may be able to set up a drawdown plan and withdraw money when they want.

If the pension saver dies aged 75 or over then the beneficiary will have to pay income tax on the lump sum or on any withdrawals from drawdown. If the pension saver was younger than 75 then there usually is no income tax to pay.

Alternatively, the beneficiary of the pension may be able to ask the pension scheme to deduct the IHT owed from the pension directly from the pension scheme. In this situation, the pension scheme will deduct the IHT before paying any lump sum or setting up a drawdown plan.

Where it can get more confusing is where the beneficiaries of the pension are different to the beneficiaries of the will, as steps will need to be taken to make sure each party pays a fair share of IHT.

OTHER CONSIDERATIONS

A few other things. Remember that any assets passed to a spouse or civil partner are free from inheritance tax. And only assets over and above the nil rate band (and residence nil rate band where applicable) are subject to inheritance tax. If the IHT is to be paid from the pension scheme, then any remaining nil rate band will be split proportionately between each pension scheme and the remaining assets in the estate.

Bringing pensions into the estate for IHT is a complex approach, and I still very much hope the Government changes its mind and chooses a different way to treat pensions on death. It will certainly save personal representatives and pension beneficiaries a lot of administrative headaches.

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