Pensions: IHT Charges: death benefits introduction
In all cases where a lump sum death benefit is paid, whether or not the payment is chargeable to Inheritance Tax, the taxpayer or agent should have completed a form IHT409.
Most (if not all) pension schemes will pay lump sum death benefits if a person dies before drawing any pension benefits. Some will also pay lump sum death benefits in the form of unused funds if a person dies whilst in drawdown. That means they are drawing or entitled to income from a pension arrangement where the funds have not been used to secure an income for life. Many lump sum death benefit payments will be subject to an income tax charge if they are made from a UK registered scheme. The charge is:
- 35% before 6 April 2011,
- 55% from 6 April 2011 to 5 April 2015, and
- 45% from 6 April 2015.
In most cases, lump sum death benefits are paid at the discretion of the pension scheme trustees or providers even where there is a nomination that expresses a wish as to the beneficiary. They are not then part of the estate or chargeable to Inheritance Tax. However there are some cases where the payment is not discretionary and Inheritance Tax is due on all or part of the lump sums.
Lump sum death benefits fall within the estate where:
- the payment is made to the estate as of right
- there is a binding nomination made by the deceased that the payment is to be made to specified beneficiaries (IHTM17052)
- for deaths before 6 April 2012, in certain circumstances, the payment includes protected rights.
Spouse or civil partner exemption is available where appropriate when the payment is part of the estate.