Inheritance Tax  

Warning HMRC to close death benefits loophole

Warning HMRC to close death benefits loophole

HM Revenue & Customs could be poised to close a loophole used for financial planning purposes as it seeks to crank up its action on tax avoidance, a provider has warned.

Jessica List, pension technical manager at self-invested personal pension (Sipp) provider Curtis Banks, said unclear guidelines around how far financial planning is allowed to go and what constitutes tax avoidance with pension contributions after the age of 75 meant HMRC could turn its attention to the area with a view to collecting more tax.

The lifetime allowance limit, which sets the amount a saver can contribute to their pensions and receive tax relief on, is last tested at age 75.

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After that age savers do not receive tax relief on contributions but are not bound by the £1m lifetime allowance limit or the annual allowance either.

This, together with more generous rules around death benefits introduced following the pension freedoms, meant more savers were looking to make large contributions later in life, Ms List said.

She said: "In beneficiaries' drawdown, tax is only charged when income is actually withdrawn, which can be managed over a number of years.

"Therefore the idea is that in many cases, the beneficiary will be able to pay less in income tax than would have been due as an inheritance tax charge.

"Additionally, with beneficiaries' drawdown, any money not withdrawn as income also remains outside of the beneficiary's estate, so there is a possible further inheritance tax saving on their death.

"The attraction of making potentially very large personal contributions after age 75 is that while there is no tax relief, the contributions also won't incur annual allowance or lifetime allowance charges which could outweigh the potential saving."

Death benefits rules were changed in April 2015, when the 55 per cent tax on death for drawdown and uncrystallised pension funds was abolished in favour of a staggered system.

Anyone dying before the age of 75 was able to pass on their remaining pension tax free, whereas, those dying after that age were able to nominate a beneficiary who is able to access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax.

Ms List said the tax office may be worried some people were making contributions not for their pensions but for tax reasons.

She said: "People are now picking up on it from an inheritance tax perspective.

"We know the government is under pressure to reduce the cost of tax relief. There is probably very little tolerance for people using pensions to get around (paying) tax."

Indeed, recent action from the government and tax office suggest an increased willingness to clamp down on what is deemed tax avoidance and evasion.

The difference between tax avoidance and tax evasion is that avoidance seeks to minimise the tax paid, generally by legal means, while evasion means knowingly not paying tax for example, hiding income-producing assets or bank accounts offshore to conceal them.