From loved ones to charities close to the heart, a person has a whole host of options of who to leave their estate (property, money, and possessions) to upon their death. However, in some cases, it may be that some of the estate is subject to Inheritance tax. At the time of writing, the standard Inheritance tax rate is 40 per cent. This may be required to be paid on the portion of an estate valued above the 325,000 threshold.
An exception to this may be if everything which is below the threshold is left to a spouse, civil partner, a charity, or a community amateur sports club.
It is also possible to increase one’s threshold, such as by giving their home to their children or grandchildren, or adding any of the unused threshold to a partner’s upon death.
What are the tax rules on inheriting a private pension?
An individual can ask their pension provider if they can nominate someone to get the money from the pension pot if they die.
It may be that the provider pays the money to someone else, such as if the nominated person cannot be found or has died.
In a defined benefit pot, the pension can usually only be paid to a dependant of the person who died.
This may be a husband, wife, civil partner, or child who is under 23, for example.
The Gov.uk website explains that it may be that the money can instead be paid to someone else if the pension scheme’s rules allow it.
However, in this case, it will be taxed at up to 55 per cent as an authorised payment, the government says.
Whether or not tax is paid on the pension will depend on the type of payment, type of pot, and the age of the pension pot’s owner when they died.
The government website’s “Tax on a private pension you inherit” section has more information on which types of payment and situations will be taxable.
However, it states that for most lump sums of a defined contribution or defined benefit pot, if the owner died before reaching the age of 75, there is no tax to pay.
But, if they died at the age of 75 or older, then for most lump sums in a defined contribution or defined benefit pot, income tax will usually be deducted by the provider.
There may be other instances when tax will be payable, even if the owner was under 75.
When it comes to Inheritance tax, Gov.uk states: “You do not usually pay Inheritance Tax on a lump sum because payment is usually ‘discretionary’ – this means the pension provider can choose whether to pay it to you.
“Ask the pension provider if payment of the lump sum was discretionary. If it was not, you may have to pay Inheritance Tax.”