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My PFS - Technical news - 09/12/2014

PFS news update from 19 November 2014 - 2 December 2014 - taxation, investments and pension news.

Items from the MyPFS email are to be found here:


Taxation and trusts


G20 High-level principles on beneficial ownership transparency

(AF1, RO3)

The G20 countries have adopted a policy document containing ten principles intended to improve the transparency of beneficial ownership of companies and trusts.

Within these principles, there is a requirement that trustees of express trusts and similar entities maintain adequate information on settlors, the protector, trustees and beneficiaries and make it available to the authorities.

However, the policy declaration suggests that central registries are a possible solution, but not a necessary solution where company ownership or trusts are concerned:

'Countries should ensure that competent authorities (including law enforcement and prosecutorial authorities, supervisory authorities, tax authorities and financial intelligence units) have timely access to adequate, accurate and current information regarding the beneficial ownership of legal persons. Countries could implement this, for example, through central registries of beneficial ownership of legal persons or other appropriate mechanisms.'

It also states:

'Countries should ensure that trustees of express trusts maintain adequate, accurate and current beneficial ownership information, including information of settlors, the protector (if any) trustees and beneficiaries. These measures should also apply to other legal arrangements with a structure or function similar to express trusts.'

Interestingly, as part of the proposed fourth EU Money Laundering Directive, there is a desire to strengthen rules that enhance the transparency of information for companies and trusts. Whilst we have not yet seen the final outcome of the proposals, the UK Government has indicated that it would not welcome an open registry of trust beneficiaries on the basis that trusts are specifically used for private purposes.


Gifts of a share in the private residence - IHT and CGT advantages and considerations

(AF1, JO3, RO3)

Following his recent death, there has been some fairly recent press speculation over the inheritance tax planning that Tony Benn may have carried out to reduce death duties on his estate.  From what we have read in the national newspapers, it would seem that far from Mr Benn having carried out aggressive tax avoidance, he (and his wife) carried out sensible and acceptable tax planning to reduce the impact of inheritance tax.

It would seem that in the late 1990s, Mr and Mrs Benn owned and lived in a valuable private residence in West London.  It would seem that the couple owned this property as tenants-in-common. This meant that, on the first death, the survivor would not automatically inherit - as would be the case if the property was owned as joint tenants. Instead, the first to die is able to leave their share of the property to whoever they wish. 

In the event, Mrs Benn died first and it was reported that she left her share of the property to their children.  This meant that the value of this share would be a chargeable transfer for IHT purposes but if it fell within her available nil rate band (£234,000 when she died) it would not give rise to any actual liability to IHT.

The effect of this would be that:

  • The share that had been gifted to the children on Mrs Benn's death would be outside of Mr Benn's taxable estate for IHT purposes.
  • The share that Mr Benn continued to own (and all of the other matrimonial assets) would be inside Mr Benn's taxable estate for IHT purposes - but he, of course, would still have his nil rate band available to offset against this value on his death.

Therefore, there would have been an effective saving of IHT on Tony's subsequent death - although, of course, since this planning took place the concept of the transferable nil rate band has been introduced.  Despite this, it would seem that Mr and Mrs Benn's planning would have been advantageous because it would seem very unlikely that any increase in the value of the nil rate band would have kept up with house price inflation in West London. 

As Mrs Benn made the gift of her interest in the house on her death, the fact that Tony continued to occupy the house as a residence would not give rise to a gift with reservation of benefit because he could occupy rent free by reason of him owning a half interest in the property.  (The article in question states that he would have to pay a market rental for his occupation but, given that Tony hasn't made a gift, we do not believe this to be a requirement).  Moreover, there would have been no CGT implications on the bequest of the property under each of their Wills because of the fact it was their principal private residence (and the bequest occurred on death when CGT does not arise).

The only real drawback with such planning is control.  Following his wife's death, Tony only owned 50% of the property and so, to a degree, would rely on his relationship with his children remaining good if he wished to stay in the property.  As joint owners his children could have forced a sale and, of course, in such circumstances, Tony would only get 50% of the sale proceeds.

To avoid the lack of control aspect, people have in the past used a discretionary Will trust as a receptacle for the half share on the first death but this does bring with it a whole host of other tax implications - not least whether, if the surviving spouse is a potential beneficiary under the trust, he/she has an interest in possession or an immediate post-death interest which will neutralise any potential IHT advantages on the second death. 

Also, of course, these days, as we mention above, the introduction of the transferable nil rate band means that the nil rate band of the first spouse to die is not totally lost if it is not used at that time.

The upshot of all this is that the planning carried out by Mr and Mrs Benn was not overly aggressive and was a reasonable way for them to each use their nil rate band - provided of course they could rely on their children! For those who want more control over what the children can and can't do, a trust can be useful.  But, as we say above, that brings with it other layers of tax complications.


The direct recovery of tax debts

(AF1, AF2, JO3, RO3)

HMRC has published a summary of the (strong) responses to their consultation on the direct recovery of (tax) debts.

The direct recovery of tax debts from the accounts of individuals and businesses is part of the (seemingly relentless) HMRC drive to improve "tax cash flow" - so to speak.

The strengthening of the DOTAS provisions and the associated introduction of accelerated payments and follower notices (to secure "tax up front" from those who have entered into certain aggressive tax avoidance schemes) have had high publicity and are part of this initiative.

The consultation, that started earlier this year, to directly recover outstanding tax from the accounts of those who had owed it for some time, stirred up some strong opinions.  There was, understandably, great concern over what was seen as a very powerful weapon (direct recovery with no appeal) in the hands of HMRC.

HMRC appears to have listened.  It has stated the following in its latest response to consultation.

'Plans to recover tax and tax credit debts directly from the bank accounts of people and businesses who refuse to pay what they owe will include strong safeguards to protect vulnerable taxpayers.

Direct Recovery of Debts (DRD) will give HM Revenue and Customs (HMRC) the ability to recover cash directly from the bank accounts, building society accounts and ISA accounts of a small number of debtors who owe £1,000 or more.  It is expected to bring in around £100 million a year.

A consultation on the plans published in May included a significant number of guarantees to provide certainty to taxpayers, such as only applying the powers to established debts taxpayers, such as only applying the powers to established debts and only targeting debtors who have repeatedly ignored attempts to make contact.

Following constructive comments from key stakeholders, such as professional and representative bodies, the government has today further strengthened the safeguards which will apply to the limited use of DRD.  These include:

  • Guaranteed visits to debtors from an HMRC officer to meet them face to face.  This will ensure that everyone subject to DRD will have had a chance to challenge and settle their affairs - whether by paying in full or setting up a payment plan - and that DRD will only apply to those who have chosen not to do so.  The visit will also allow HMRC to identify vulnerable members of society to provide them with appropriate support.
  • Establishing a new, specialist unit to deal with cases involving vulnerable members of society, as well as providing a dedicated DRD team and helpline.
  • Ensuring that judicial oversight of the process is enshrined in legislation, by allowing for appeal to the County Court.
  • Putting a hold on debtors' accounts and giving them 30 days - more than twice as long as previously planned - to contact HMRC and arrange payment of the debt or object to the use of DRD, before any money is taken.
  • Further new safeguards relating to transparency, governance and a phased implementation of the DRD powers.

These are all in addition to existing guarantees, such as only taking action against those with over £1,000 of tax or tax credits debt, to always leave a minimum of £5,000 across debtors' accounts, and to only put a hold on the funds in the affected account up to the value of the debt.

Financial Secretary to the Treasury David Gauke said:

"This is about levelling the playing field.  The vast majority of people pay the tax that is due, on time, but there is still a very small minority who try to gain an unfair advantage by persistently refusing to pay what they owe, despite being able to.  These are the people who will be targeted by the powers for the direct recovery of debts owed to the Exchequer.

We already set out robust safeguards to protect vulnerable debtors in our original Direct Recovery of Debts proposals, but feedback from the consultation process told us we could do more to make sure this only catches those who are playing the system.

We're strengthening the guarantees we can offer taxpayers that the powers will only be used when debtors have consistently refused to talk to HMRC and settle their debts, and their use will be subject to the toughest scrutiny and oversight possible.

We're far from the first country to take this step - many other tax authorities already use similar powers routinely and responsibly as a crucial lever to ensuring their government is paid what is owed."

HMRC will continue to work proactively with key stakeholders, such as professional groups and those representing vulnerable customers, on the detail of the DRD process.  The government is grateful for the helpful input from everyone who responded to the consultation, which has allowed it to strengthen the safeguards.

HMRC estimates DRD will apply to around 17,000 cases a year, with the average debt of those affected £5,800.  Around half of these cases will involve debtors with more than £20,000 in their bank and building society accounts.'

While changes concerning the "administrative" side of tax might not seem to be that close to the heart of financial planning and somewhat outside the remit of financial advisers, this particular subject is one that we are sure will be of interest to clients.

This is not about the anti-tax avoidance drive.   This is about when HMRC can directly access your bank account to collect tax.  The subject made the front pages of some newspapers when it was first proposed so knowing what the latest position on this is, when talking to your clients and professional connections, will not do any harm.


Scotland - proposed tax changes

(AF1, AF2, AF3, CF4, RO3, RO4, JO3)

Details of the powers over tax and benefits that could be devolved by the UK government to the Scottish government have been released.

Prior to the Scottish referendum, the Westminster-based UK Parliament promised that, in the event of a vote against independence, it would actively consider a devolution of certain powers over tax to be devolved to the Scottish Parliament.

As a result of this (and in light of the "no" vote), a Commission, known as the Smith Commission, was set up.  This Commission has now released its recommendations. Lord Smith, the Chairman of the Commission, said that if the changes were implemented they would deliver a stronger Scottish Parliament which would be more accountable and more autonomous because any tax revenues paid to the Scottish government would cause a reduction in the block grant they currently receive from the UK Parliament.

The main recommendations of the report are as follows:

1. Income Tax


  1. Income tax will remain a shared tax and both the UK and Scottish Parliaments will share control of income tax. MPs in Parliament representing constituencies across the whole of the UK will continue to decide the UK's Budget, including income tax.
  2. Within this framework, the Scottish Parliament will have the power to set the rates of income tax and the thresholds at which these are paid for the non-savings and non-dividend income of Scottish taxpayers.  This does not apply to personal allowances (see below).
  3. There will be no restrictions on the tax thresholds or rates of tax that the Scottish Parliament can set.
  4. All other aspects of income tax will remain reserved to the UK Parliament, including the imposition of the annual charge to income tax, the personal allowance, the taxation of savings and dividend income, the ability to introduce and amend tax reliefs and the definition of income.
  5. The Scottish government will receive all income tax paid by Scottish taxpayers on their non-savings and non-dividend income.  This payment will be taken into account by a corresponding adjustment in the block grant it receives from the UK government.  This block grant is currently worth about £30 billion a year. The Scottish Parliament will therefore become more accountable to Scottish taxpayers for its spending.
  6. Given that income tax will still apply on a UK-wide basis, albeit with different rates and thresholds in Scotland, it will continue to be collected and administered by HMRC.
  7. The Scottish government will reimburse the UK government for any additional costs as a result of the new system.


2. Value Added Tax (VAT)

The receipts raised in Scotland by the first 10 percentage points of the standard rate of VAT will be allocated to the Scottish government's budget.

These receipts will be calculated on a verified basis, to be agreed between the UK and Scottish governments, with a corresponding adjustment to the block grant received from the UK government.

3. Air Passenger Duty

The power to charge tax on air passengers leaving Scottish airports will be devolved to the Scottish Parliament. The Scottish government will be free to make its own arrangements with regard to the design and collection of any replacement tax, including consideration of the environmental impact.

Again, the Scottish government's block grant from Westminster will be adjusted accordingly.

4. Other Taxes

All aspects of National Insurance contributions, inheritance tax and capital gains tax, corporation tax, fuel duty and excise duties will remain reserved to the UK Parliament, as will all aspects of the taxation of oil and gas receipts.

The Commission has called on the UK and Scottish governments to work together to avoid double taxation and make administration as simple as possible for taxpayers.

5. Benefits, welfare and pensions


  1. State pension

    All aspects of the state pension will remain shared across the United Kingdom and reserved to the UK Parliament. This includes the new single-tier pension, any entitlements to legacy state pensions, whether in payment or deferred, pension credit and the rules on state pension age.
  2. Universal Credit

    Universal Credit (UC) will remain a reserved benefit administered and delivered by the Department for Work and Pensions.

    However, the Scottish government will be given the power to change the frequency of UC payments, vary the existing plans for single household payments, and pay landlords direct for housing costs in Scotland.

    The Scottish Parliament will also have the power to vary the housing cost elements of UC, including varying the under-occupancy charge and local housing allowance rates, eligible rent, and deductions for non-dependants.

    But the power to vary the remaining elements of UC and the earnings taper will remain reserved. Conditionality and sanctions within UC will also remain reserved.
  3. Benefits devolved outside Universal Credit

    Powers over the following other benefits in Scotland will be devolved to the Scottish Parliament:

    • Benefits for carers, disabled people and those who are ill, Attendance Allowance, Carer's Allowance, Disability Living Allowance, Personal Independence Payment, Industrial Injuries Disablement Allowance and Severe Disablement Allowance.
    • Benefits which currently comprise the Regulated Social Fund: Cold Weather Payment, Funeral Payment, Sure Start Maternity Grant and Winter Fuel Payment
    • Discretionary Housing Payments.

    The Scottish Parliament will have complete autonomy in determining the structure and value of these benefits or any new benefits or services which might replace them.
  4. Benefits reserved outside Universal Credit

    Responsibility for the following benefits will remain reserved to Westminster:

    • Bereavement Allowance
    • Bereavement Payment
    • Child Benefit
    • Guardian's Allowance
    • Maternity Allowance
    • Statutory Maternity Pay
    • Statutory Sick Pay
    • Widowed Parent's Allowance
  5. Powers to create new benefits

    The Scottish Parliament will have new powers to create new benefits in areas of devolved responsibility, as well as new powers to make discretionary payments in any area of welfare without the need to obtain prior permission from the Department of Work and Pensions.

    This is the start of what could be a long-term devolution of powers over taxation and benefits to the Scottish Parliament. The views on it very much depend on who you represent.

    Some Westminster MPs feel it is unfair for Scottish MPs to set tax rates for the rest of the UK that they would not pay themselves.  For example, a tax rate of 22% on earnings could be set in England while the Scottish Parliament imposes a tax rate of 20%.

    On the other hand, SNP members would obviously prefer more control over taxation and welfare benefits than the 70% and 85% that it is proposed will be conferred.

    No changes are proposed for inheritance tax and capital gains tax.

    One question that does arise is that as different basic rates of tax may well apply on earned income, will this result in different tax deductions at source in respect of pension contributions depending on whether the individual payer is resident in Scotland or England? We will have to wait and see what the outcome on this is. 


Entrepreneurs' relief

(AF1, AF2, RO3, JO3)

The National Audit Office (NAO) has said that HMRC has done little to investigate why entrepreneurs' relief has cost the public £2 billion more than expected last year.

The NAO said that HMRC did not monitor or report the costs and benefits of tax reliefs intended to change behaviour in a way that would allow the government, parliament or the public to know if such reliefs were working as intended.

The BBC reported that HMRC was accused of carrying out "only limited analysis" to find out why the cost of the relief has risen by more than 500% to £2.9 billion in the five years to 2013/14 and whether it might have been down to misuse. However, a spokesman for HMRC said, "It is nonsense to suggest that our administration of tax reliefs loses money." He stressed that "we robustly monitor the implementation of reliefs, and identify and tackle abuse as a routine part of our compliance work" and measures in place to manage tax reliefs were "highly effective".

By way of reminder, entrepreneurs' relief applies in respect of capital gains arising on 'material disposals of business assets' where certain conditions are met.

Broadly, for an individual these are:

  • a disposal of the whole of a business, carried on by an individual alone or in partnership,
  • a disposal of part of a business carried on by an individual alone or in partnership,
  • a disposal by a partner of the whole or part of his or her interest in a partnership,
  • a disposal of an asset previously used in a business carried on by an individual alone or in partnership within 3 years after the business has ceased,
  • a disposal of shares in (or securities of) a company which is either a trading company or a holding company of a trading group, where the individual
    • is an officer or employee of the company or of one or more companies in the group, and either
    • held 5% of the ordinary share capital of the company and was able to exercise 5% of the voting rights in the company, or
    • for disposals on or after 6 April 2013, the shares were acquired by the individual on or after 6 April 2012 on the exercise of an option under the Enterprise Management Initiative (EMI) scheme.

Entrepreneurs' relief may also apply in cases where an 'associated disposal' takes place as part of the 'material disposal', for example, sale of an asset personally owned by a partner or company employee.

To qualify for relief, the individual taxpayer has to meet all qualifying conditions throughout the period of one year ending with the date of disposal.

Gains which qualify for relief are taxed at 10%, subject to a cumulative lifetime limit of £10 million since April 2011.

It would be interesting to know just why the relief is costing so much more than anticipated.  There could be a number of reasons for this including more sales, sales giving rise to bigger gains, more businesses qualifying for relief etc…  Or, more importantly, if more people are becoming or being made aware of this valuable relief - this is when an adviser may be able to provide relevant assistance.


Investment planning

October IMA statistics

(AF4, RO2, CF2)

The latest Investment Management Association (IMA) statistics show net retail inflow recovering from the low levels of recent months, despite the global market volatility that occurred.

October was a whiplash month when viewed on investment charts. For example, the FTSE 100 started the month at 6,622.7, but by the 16th had fallen to 6,195.9 only to then rebound to finish October at 6,546.5. At first sight that it not a pattern to encourage retail investors to part with their cash, but surprisingly the IMA numbers show something different.

October net retail sales were £2.0bn, up from (a revised) £728m in September and above the monthly average for 2014 to date of £1.79bn. The main features of the month's data were:

  • The rise in net retail sales for the month was primarily due to an increase in gross retail sales of £1.054bn to £14.4bn. Repurchases were down £194m, at a still relatively high figure of £12.424bn. As we have often said, the net figures hide two much larger opposing gross numbers.
  • Equity resumed its role as the most popular asset class in terms of net retail sales, with a net inflow of £981m. Property, the previous month's winner, attracted a net £274m. It was beaten into third place by Mixed Asset (£361m).
  • The most popular sector in terms of net retail sales for the fifth successive month was UK Equity Income. Second, third and fourth most popular were Property, Targeted Absolute Return and Mixed Investment 20%-60% shares.
  • After last month's record £852m net retail outflow from UK All Companies, October was a more normal month, with the sector registering its first net retail inflow (at £168m) since April.
  • 17 of the IMA's 36 sectors saw net retail outflows. The European Smaller Companies sector saw £288m disappear, leaving the sector valued at £3.8bn. UK Smaller Companies also saw a net outflow of £61.3m. 
  • Tracker fund net retail sales hit a new monthly record with sales of £590m - almost 30% of the IMA monthly total. Tracker fund total investment is now £89.3bn, 10.9% of all IMA funds under management - up from 9.7% a year ago.

These numbers underline the continued march of index-linked funds and the unpopularity of European Smaller Companies, where net retail outflow has amounted to £690m over the last four months.


Delay in peer-to-peer ISAs expected

(AF4, RO2, CF2)

Christine Farnish, who chairs the Peer-to-Peer Finance Association (P2PFA), has warned that we may see a delay in the introduction of peer-to-peer ISAs from its original planned start date of April 2015 due to technical negotiations and the parliamentary process.

"They are currently consulting and there are some technical issues. The Treasury will have to finish consulting and receive the feedback and they will then need to amend the regulations in Parliament," she said.

"They will probably leave that to a new government, perhaps at the back end of 2015."

The government is currently consulting on this change and inviting views on how best to cater for a peer-to-peer lending ISA.

And, while Christine Farnish has said the proposals may be delayed, there was no indication that peer-to-peer ISAs would not go ahead as they have had backing across the political spectrum - so we'll just have to wait and see!


Retirement planning

You should be aware of the following:


Capped drawdown - HMRC relevant annuity rate

(AF3, RO4, CF4, JO5, FA2)

The appropriate adult rate for capped drawdown commencing (or reaching a review date) in:

November 2014 - 2.25%

December 2014 - 2.50%



(AF3, RO4, CF4, JO5, FA2) 

The annuity interest (AIR) to be used in TVAS calculations for the month from:

6 December - 2.90%

6 January - 2.90%


Taxation of Pensions Bill - death benefits taxation

(AF3, RO4, CF4, JO5, FA2)

In the summer of 2014, the Government released draft clauses for the Taxation of Pensions Bill 2014. The legislation deals with the taxation of pension benefits under the pension flexibility rules and will come into effect on 6th April 2015.

At the Conservative Party conference at the end of September, the Chancellor announced that the 'death tax' on pension funds was to be relaxed and it would be easier for individuals to pass their pension funds to beneficiaries on death. The Taxation of Pensions Bill was published on 21st October 2014 but, other than the rate of tax payable, did not deal, in detail, with the taxation of death benefits or who may benefit. The detail/fine print of the death benefit changes were announced on 6th November 2014 via amendments to the Taxation of Pensions Bill at the Public Bill committee stage of the parliamentary process.

The most important amendment concerns the payment of death benefits when the pension fund continues in drawdown after the member's death. Provision is now made for individuals other than 'dependants' to inherit unused drawdown funds. In this respect, the Bill introduces the concept of Nominee and Successor beneficiaries. The new legislation will mean that any individual can inherit unused drawdown funds or uncrystallised money purchase funds on the death of the member, where those funds are used to provide a drawdown pension or pay a lump sum death benefit.

In order to enable somebody who is not a dependant to benefit from the drawdown funds, there will be a new Nominee's flexi-access drawdown fund. In addition any beneficiary (that is, a dependant or a nominee) with unused drawdown funds on their death can pass those funds to a successor to be designated to provide a drawdown pension for that individual (a successor's flexi-access drawdown fund) or to be paid as a lump sum death benefit.

Death benefits from funds in flexi access drawdown can continue to be payable in the form of a lump sum or as part of income drawdown and subject to certain conditions being met, these payments can be tax free.

How can death benefits be paid by a money purchase registered pension scheme from 6 April 2015?

On the death of the Member, death benefits can be paid either as a lump sum or be retained in the pension fund and be taken as income drawdown.

On the death of the person entitled to drawdown, it will be possible for either drawdown to continue to another beneficiary or for a lump sum to be paid.

(i) Payment of lump sum on death of member

Here the pension scheme Trustees/Scheme Administrator will typically exercise their discretion in favour of one of a discretionary class. If the payment is made within 2 years of the date of the members' death, it will be tax free (if the member was under age 75 when he died) or taxed at 45% if over 75 when he died.

The requirement for certain lump sums death benefits to be paid as authorised payments within a two-year period will be removed. However lump sums not paid within this period will be taxable at the recipient's marginal rate.

(ii) Retained as drawdown

On the member's death, the pension fund can be designated to a flexi access drawdown account. Here the person entitled to continue to drawdown will be either

  • Dependant (as current rules)
  • Nominee
  • Successor

Where the death of the member occurred before age 75, any payments of income drawdown to the beneficiary or successor can be made tax free provided the funds are designated to the drawdown account within a two-year period.

Where the designation is not made within two years, or the member had reached age 75 at the time of their death, all payments of drawdown pension will be subject to the recipient's marginal rate, but will not be tested against the lifetime allowance.

What is a nominee?

For someone that is not a dependant, there will be a new category of recipient, a Nominee who can benefit from a drawdown account. A nominee is an individual that has been nominated by the member or the Scheme Administrator but who is not a dependant of the member. The Scheme Administrator cannot name a Nominee whilst there is a dependant of the member.

What is a successor?

A successor can inherit the pension fund on the death of a dependant, a nominee or previous successor. The successor can be nominated by either the dependant, the successor of the member or the Scheme Administrator.

On the death of the member of a money purchase pension scheme, the funds can be used to provide benefits to a dependant, or a nominee if there are no dependants. On the death of the dependant or nominee, a successor can inherit the funds, and this can be passed on through the generations until the funds are exhausted either because they are all taken as income or a lump sum is paid out, thereby extinguishing the fund.

What lump sum death benefits can be paid where a member dies before age 75 and death benefits are paid out after 5 April 2014?

  • Uncrystallised funds lump sum death benefit (New BCE; subject to Lifetime allowance Test)
  • Capped drawdown funds lump sum death benefit
  • Flexi access drawdown fund lump sum death benefit
  • A Charity lump sum death benefit

If a lump sum is paid by the trustees/scheme administrator exercising their discretion in favour of a beneficiary, it will not be subject to tax if:

  • it is paid within 2 years of the member's death (or the date the Scheme Administrator ought to have known of the death) and
  • the deceased member has sufficient available lifetime allowance.

If any of the funds are in excess of the member's Lifetime Allowance then that portion will be subject to a lifetime allowance charge.

The requirement for certain lump sums death benefits to be paid as authorised payments within a two-year period will be removed and so the previous 55% tax charge will no longer apply. However lump sums not paid within this period will be taxable at the recipient's marginal rate.

How can death benefits be paid as income drawdown to beneficiaries on the death of the member before age 75?

Instead of paying a lump sum on the death of the scheme member, the fund can continue to be held in or designated to flexi-access drawdown. Payments can continue to be made to beneficiaries in the following form:

  • Dependants/Nominee/Successor flexi access drawdown
  • Dependants/Nominee/Successor short term annuity
  • Dependants/Nominee/Successor lifetime annuity

If income is taken via a short term annuity or flexi access drawdown, the income is not subject to income tax providing that the funds are designated within a two year period. Lifetime annuities will continue to be taxable on the recipient.

What form of lump sum death benefit can be payable where the member dies on or after age 75?

The following type of lump sum death benefit can be paid:-

  • Uncrystallised funds lump sum death benefit (New BCE; subject to Lifetime allowance Test)
  • Capped drawdown funds lump sum death benefit
  • Flexi access drawdown fund lump sum death benefit
  • Charity Lump sum death benefit

If the pension scheme member (dependant, nominee or successor), dies aged 75 or more, the appropriate lump sum payment will be subject to the special lump sum death benefits charge (45% from 6/4/15). There is no 2 year rule applying to these lump sum payments.

If the fund remains in drawdown and the appropriate beneficiary takes income drawdown, this will be taxable at the recipient's marginal rate(s).

What happens on the death of a beneficiary (ie. a dependant, nominee or successor) who is entitled to flexi-access drawdown?

The remaining fund can be paid as a lump sum (a flexi-access drawdown fund lump sum death benefit) or a new beneficiary can continue in drawdown. If a lump sum is paid, it will in general be tax free if the deceased beneficiary was aged under 75 when he died and the payment is made within 2 years of the deceased beneficiary's death.

If payments are made under income drawdown they will be taxed at the recipient's marginal rate of income tax if the previous deceased beneficiary died at age 75 or more.

Tax treatment of death benefits paid after 5 April 2015 following the member's death


- Death benefit Tax LTA CHECK
Death of member before age 75 - - -
- Lump Sum Tax free if paid within 2 years of date of member's death (1). Otherwise taxed at recipient's rate. Yes BCE 5C
- Flexi access income drawdown or short term annuity (2) Tax free if designated within 2 years No
- Lifetime annuity Taxed at recipients marginal rate(s) No     
Death of a member at age 75 or later - - -
- Lump sum 45% (2015/16) No
- Flexi access income drawdown or short term annuity (2) Taxed at recipient's marginal rate(s) No
- Lifetime annuity Taxed at recipients marginal rate(s) -
  1. Or within 2 years of the Scheme Administrator reasonably knowing of the death.
  2. Lump sums paid on the death of a dependant, nominee or successor (a 'beneficiary') would normally be free of tax if:
    1. the previous deceased beneficiary died before age 75 and
    2. the payment is made within 2 years of the pension beneficiary's death. 


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