14th November 2024

October Budget: changes to pensions and the impact that has on those leaving 10% of their estate to charity

The implications of the budget will continue to be felt many months if not years into the future. The changes, as far as money purchase pensions, with value in them at the date of the pensioner’s death counting towards that individual’s Inheritance Tax estate, only comes in as of April 2027. For those who die before then, the old rules apply and so, for now, anyone who has a valid nomination form in place can rest easy in that either a death benefit will be payable which, if the nomination is appropriate, will be at no Inheritance Tax or Capital Gains Tax indication for the recipients, or there will be an inherited pension (free of Inheritance Tax). 

But in the brave new world of pensions and indeed Inheritance Tax post April 2027, the value of an individual’s pension will be added to their other assets for Inheritance Tax calculation purposes at the date of their death. 

 

Where the estate, and indeed, very probably, the pension is inherited by a spouse or a civil partner at that point in time, there will be no adverse Inheritance Tax implications. That is assuming, in the majority of cases, that the receiving spouse or civil partner is UK domiciled. Care may be needed where they are otherwise.

But the issue, however, is very much as to what happens when the estate and/or the pension does not pass to a surviving spouse/surviving civil partner, quite possibly because there is no such individual. What happens if it passes elsewhere?

 

Since 2015, it has been possible to leave 10% of one’s estate on death to UK registered charities and one receives two clear Inheritance Tax benefits. The first is that the money passing to the said charities is Inheritance Tax exempt and therefore if one leaves £100,000.00 to charity, the charities receive £100,000.00. Assuming the estate is one accessible to Inheritance Tax at the date of the Testator’s death, this means that £40,000.00 less Inheritance Tax is paid than would otherwise be the case if the £100,000.00 had been inherited by a non-charity, non-spouse etc of the Testator.

The other benefit is that if the £100,000.00 being left to the UK charities is 10% of the deceased’s net estate, then the rate of the Inheritance Tax payable on the rest of the estate decreases to 36% from 40%.

 

By way of an example, let us assume an estate of £2million. Let us assume that 10% passes to a single UK registered charity i.e. £200,000.

Our assumption is that the 90% left is passing to the Testator’s two children. In this example, the estate has the benefit of the full Nil Rate Band (NRB) allowance of the Testator and a transferable NRB from the testator’s deceased spouse (£650,000 in total), alongside the Residential NRB of both (£350,000). In other words, £1million worth of the estate is exempt from Inheritance Tax. Looking at the part of the estate which is liable to Inheritance Tax (and is not passing to charity) that equates to £800,000.00. Ordinarily one would have an Inheritance Tax bill on that component at 40%. 40% of £800,000.00 is £320,000.00. But in this instance, the rate is reduced to £36% of £800,000.00 which is £288,000.00, a reduction of the amount of tax suffered of £32,000.00. This accrues to the two children.

 

To an extent, the charitable rate reduction has always been slightly complex in that often one has to look at not just the free estate of the deceased at the date of their death. One may also have to look at any interest in an Immediate Post Death Intent Trust set up by Will and/or a pre-2005 set up Interest in Possession Trust. Sometimes this will not be relevant, but sometimes one has to look at any assets deemed to be in the estate for the purpose of Inheritance Tax by reason of this Gift with Reservation of Benefit. Again, as per the trust inclusion, in some instances this will be relevant but in many instances it will not be. These are both known inclusions, and your solicitor should be able to discuss and determine with you whether or not this is an issue when they are drafting your Will seeking to leave 10% of your estate to charity.

 

The inclusion of pension assets is, from a drafting viewpoint, an unwelcome addition. We will need to add the value of the pension to the estate for purposes of Inheritance Tax. It may, however, not be that easy to redirect parts of the pension. Pensions are something that generally require expert advice from appropriately qualified Financial Advisers and the writer does not attempt that in this article or generally. It may or may not be possible to leave a part of an unused pension entitlement to a UK charity. One should look to discuss that with an appropriate qualified pension adviser.

But if it is not possible, then the inclusion of the pension fund as at date of death, where it is not relieved by a spouse, will dilute the 10%. This means that the 10% of the free estate, any Gift with Reservation of Benefit and any trust entitlement will actually be worth less than that when one adds in the effect of the pension.

 

What does that mean? For the charity, it means very little, the charity will receive 10% of the free estate and, and where appropriate and where drafted, the trust entitlement and reservation of benefit. Charities may not necessarily, or immediately, see any difference in what they receive. But what is important is that the Inheritance Tax rate reduction will not be given because the amount passing to charity, all told, will be less than 10%. That means the rate reduction that the beneficiaries may have been hoping for and (and indeed the Testator) will not be given. This will lead to an unforeseen additional Inheritance Tax burden.

 

Over time, this may have the effect of dissuading folk from leaving 10% of their estate to charity if they cannot be guaranteed that they will be able to achieve the rate reduction.

We will have to wait to see whether it has that effect but, as from April 2027, even greater care will be needed when drafting Wills where one is trying to leave 10% to charity with a goal, at least in part, to engineer a rate reduction.

You should look to talk to your solicitor with details not only of your likely free estate by any interests in, qualifying trusts and Gift with Reservation of Benefit assets, but also the value of your pension at that point in time. Life continues to be perhaps more exciting than would be Testators and indeed Will draftsmen would wish.

For more advice in this subject, please contact Edward Walter on 01892 502 320 or ewalter@bussmurton.co.uk.

Edward Walter

Edward Walter
Partner