Industry welcomes under 75 IHT reversal

The Chancellor’s reversal on the proposed Inheritance Tax (IHT) rules for those aged under 75 has been welcomed from most of the industry.

In the original proposals, published last July, people under the age of 75 who died in income drawdown or phased retirement would be subject to IHT unless the executors of the estate could prove the member had not been engaged in “estate planning” to leave their fund to beneficiaries.

However in yesterday’s Budget, the Government have reversed the proposals to leave IHT to apply to those under 75 in the same way as it does now, and with those over 75 and going into an Alternatively Secured Pension (ASP) liable to a 40% IHT charge is they pass the funds on to non dependants.

The change has been welcomed by the industry with Helen McCarthy, head of pensions development at the Association of British Insurers (ABI) claiming the announcement is a victory for common sense.

She adds: “We are pleased the Government has listened to the industry and will maintain existing IHT exemptions where death occurs before the age of 75 and that further exemptions will apply in relation to spouses or civil partners, other dependants and charities where death occurs after age 75.”

Simon Farrant, head of pensions development at Towry Law, agrees the proposed treatment of death benefits under pension schemes is sensible and brings much needed clarity.

He says: “The proposal this tax charge will be paid of scheme assets rather than the estate ends speculation about estates having to bear the costs of large pension funds moving down generations. These changes will mean many wealthy individuals will defer taking pension benefits beyond 75m with the 40% charge seen in many cases a better alternative to annuity purchase.”

John Lawson, head of pensions policy at Standard Life, says: “They’ve completely reversed the pre 75 rules proposed in the draconian consultation last year. It is good common sense and a big win for the industry.”

And Rachel Vahey, head of pensions development at Scottish Equitable, agreed it was fantastic news adding it was a lobbying success for the industry to have the continuation of current rules for those under the age of 75.

But not everyone in the industry was so pleased with the announcement, with Nick Rudd, pensions director at BDO Stoy Hayward, saying although clarity on the issue is welcome, he expressed disappointment at a missed opportunity.

He says: “The original proposals were, in our opinion, a real chance for individuals to make proper provision for their retirement in the knowledge that those funds would become their children’s pensions in due course. Levying a 40% tax charge on death rather takes the allure out of funding for the future.”

Meanwhile, Hyman Wolanski, head of pensions at Alliance Trust Savings, agrees the decision to keep current IHT rules for under 75’s is good, but expresses concerns on the complexity of the issue of those over 75, as well as the timing of the announcement.

He says the Government clearly still has a problem with the fact many people have non-religious grounds for not buying an annuity and has come up with an unnecessarily complicated mechanism for penalising the dependants of anyone in drawdown who is fortunate to survive beyond the age of 75.

Wolanski adds a more straightforward solution would have been to treat those older than 75 in exactly the same way as those under 75, by allowing the balance of the fund to be paid out less a 35% tax charge.

He says: “It is a great shame the ‘Pensions Simplification’ initiative, which has much to commend it, should fall at this particular hurdle. And it is especially disappointing this announcement comes only two weeks before the new rule changes of A-Day, giving people and the industry as a whole little notice to adapt their existing plans to this new tax rule.”

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