There were no surprises in George Osbornes Autumn Statement to match the radical pension changes in his last Budget.
However, he did pull one rabbit out of the hat for savers in the shape of new inheritability of ISAs for married couples.
He also confirmed how pension wealth can be cascaded down the generations.
ISA inheritability
ISA savers will benefit from two positive changes:
- The annual allowance will increase to 15,240 from 15,000 from April 2015.
- From yesterday, spouses and civil partners will be able to inherit their deceased partners ISA fund and retain the tax advantages of the wrapper. There will be no impact on the spouses/civil partners own ISA annual allowance.
ISA accounts left to a spouse or civil partner will of course continue to pass IHT free as before – the transfer itself being covered by the spousal exemption. The big difference is that the continuing returns on a deceased partners savings will be tax free.
Pension freedoms confirmed
Confirmation of the new Defined Contribution pension death benefit regime puts the final icing on the cake for next Aprils world of freedom & choice.
- On death before 75, any death benefit will be paid tax free within the Lifetime Allowance (LTA). In a change from the original proposals, this will now apply to survivors annuities and pension guarantee payments as well as inherited drawdown pots.
- On death at 75+, death benefits will be taxed as the recipients income, when they draw the funds. For 2015/16 only, non-drawdown lump sums will be taxed at a flat rate of 45% – but income tax will apply to all post-75 death benefits from 2016/17 onwards.
- The old tax distinction between crystallised and uncrystallised pots is gone. Within the LTA, the sole determinant of tax treatment will be the deceaseds age at death.
- Any individual beneficiary of a flexible pension can choose to keep their inherited pension pot in the drawdown wrapper and decide when (or if) they draw down on it.
These changes transform the wealth transfer planning equation. This places flexible pensions at the heart of inheritance planning going forward, opening up exciting new advice opportunities.
On the flip side, as widely expected, those accessing the new freedoms will pay the price of a reduced 10,000 money purchase Annual Allowance and no future carry forward.
- This sends a clear message to maximise pension funding before accessing the new flexibility.
- And the exemptions for existing capped drawdown users, and those only drawing tax-free cash after April, position advice as the map to navigate this tax minefield to keep options open.
U-turn on IHT settlement nil rate bands
The Government has confirmed that it has scrapped plans to introduce the IHT settlement nil rate band and replace it with new rules to be announced in next weeks Finance Bill. The replacement rules will still seek to prevent tax avoidance through the use of multiple trusts.
The settlement nil rate band rules would have seen each settlor have just one nil rate band which they could allocate across all relevant property trusts that theyve created. Trusts created before 7 June 2014 would have remained subject to the old relevant property rules, leaving two sets of complex rules operating in parallel.
The result could have saddled clients with trusts where the purpose is to accept the payment of death benefits, such as from life assurance contracts and pensions, with the burden of tax compliance and reporting, even where no inheritance tax is due.
We await the detail in the Finance Bill and hope that it delivers on the promise of simplifying the taxation of trusts and IHT.
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