A New Way To Potentially Reduce Your Inheritance Tax.

15/03/2011

Pensions are set to become a more attractive way to shelter assets from Inheritance Tax (IHT).

From April 2011, death duties on income drawdown pots are to be slashed from 82% to 55%.  This change in the tax treatment of pension funds on death is one of several rule changes being brought in along with the abolition of the effective compulsion to buy an annuity by age 75.

The new death benefit rules will mean many wealthy income drawdown investors who are currently running down their pots to minimise their IHT liabilities will have to completely change their estate planning strategy. 

Although most income drawdown investors need to live off their pension pots, many wealthy people typically take as much as they can out of their pension funds currently and make gifts or pass on their cash through trusts.  Running down an income drawdown pot currently avoids the risk of being hit by the massive 82% tax levied on assets left in the fund on death after age 75.

But from April 6^th 2011, tax on residual funds on death will be 55%, regardless of age.  For higher rate taxpayers with estates above the nil rate band, this compares favourably with being taxed at 40% on withdrawal from the fund and then running the risk of being hit again, this time with IHT of 40% of the amount withdrawn.

 Paul Dixon – Chartered Financial Planner