Inheritance Tax: treatment of pension scheme drawdown funds on death
Published 9 December 2015
© Crown copyright 2015
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This publication is available at https://www.gov.uk/government/publications/inheritance-tax-treatment-of-pension-scheme-drawdown-funds-on-death/inheritance-tax-treatment-of-pension-scheme-drawdown-funds-on-death
Who is likely to be affected
Personal representatives and beneficiaries of registered pension scheme members who had unused funds in a drawdown pension fund or a flexi-access drawdown fund at the time of their death.
General description of the measure
The measure extends the scope of the current Inheritance Tax (IHT) exemption so that the failure to draw down all of the designated funds before a pension scheme member’s death will not trigger an IHT charge.
Policy objective
This minor change will ensure that the exemption applies as originally intended from 6 April 2011.
Background to the measure
An IHT charge may arise if a person reduces the value of their estate by failing to exercise rights they have over property. This general rule does not apply to funds held in pension schemes to which a person fails to become entitled. When a person takes their pension benefits, or elects to draw down all or part of their pension, they become entitled to those funds. Having become entitled, if they fail to exercise their rights over those drawdown funds leaving funds undrawn on their death, the general rule applies and an IHT charge may arise.
From April 2015 the government introduced changes to the pension tax rules that allowed more people to flexibly access their money purchase pension funds from age 55. This flexibility and an increase in drawdown arrangements means the IHT charge could potentially apply to more people when they leave undrawn funds in their pension scheme when they die. It was not intended that an IHT charge should arise in these circumstances and this measure ensures that it does not do so.
Detailed proposal
Operative date
The measure will be backdated and will apply to deaths on or after 6 April 2011.
Current law
The general rule in section 3(3) of Inheritance Tax Act 1984 (IHTA) provides that a charge to tax may arise if a person reduces the value of their estate by failing to exercise rights they have over property.
This rule does not apply to funds held in pension schemes to which a member has not become entitled, section 12(2ZA) IHTA.
However, the exemption does not apply when a person has exercised their pension rights and fails to fully draw all the pension benefits to which they have become entitled. Leaving undrawn funds in a drawdown pension at death may, therefore, cause a charge to arise.
Proposed revisions
Legislation will be introduced in Finance Bill 2016 to extend the scope of the exemption so that the general rule in section 3(3) IHTA does not apply when a person does not withdraw all of their pension funds from a drawdown pension fund or flexi-access drawdown fund before their death. This change will be backdated to apply to deaths on or after 6 April 2011 when the exemption in section 12(2ZA) IHTA was introduced.
Summary of impacts
Exchequer impact (£m)
| 2015 to 2016 | 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|---|
| negligible | negligible | negligible | negligible | negligible | negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
The measure will only affect estates where:
- individuals have designated funds for drawdown in defined contribution pension schemes
- those individuals have not withdrawn all of the drawdown funds before they die
- death benefits have become payable
- the sum of the undrawn funds plus the amount of any other transfers made in the 7 years before death plus the value of their estate is more than the IHT threshold (currently £325,000 for an individual and up to £650,000 for a surviving spouse or civil partner)
The numbers affected will be very small and likely to be in the hundreds.
The administrative impact of this measure is not on the deceased individual but on the executors or administrators of their estate. Personal representatives may need to check whether any death benefits paid have been taxed and whether a repayment may be due.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
HM Revenue and Customs (HMRC) does not hold data on the protected characteristics of all those potentially affected but this measure should not have an impact on any of those groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses and civil society organisations. HMRC believes the measure will have negligible impact on pension providers, financial advisors, solicitors, estate practitioners and other professional advisors who may wish to be aware of the changes.
Operational impact (£m) (HMRC or other)
There will be no significant additional operational impacts from this legislative change.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through communication with affected taxpayer groups to ensure the legislation operates as intended.
Further advice
If you have any questions about this change, please contact Sanjeev Virk on Telephone: 03000 575577 or email: sanjeev.virk@hmrc.gsi.gov.uk.