This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
IHT is due when, on an individual’s death, the estate is worth more than the current ‘nil rate band’ – for the 2023/24 tax year this is £325,000, unless the individual’s estate has been left to their spouse/civil partner, a charity or a community amateur sports club. The nil-rate band may be increased up to £500,000 (in tax year 2023/24) if the individual has given away their home to their children or grandchildren. The nil rate band may be higher than this – if someone dies and their nil rate band is not fully utilised, the unused amount can be transferred to their spouse or civil partner. The IHT rate is currently 40% of the value of the estate above the nil rate band.
Lump sum death benefits paid from occupational or personal pension schemes are generally not considered for IHT when they are paid at the discretion of a third party (usually the scheme administrator/trustees). This is the case even when there is a nomination by the member that expresses a wish to pay to a specified beneficiary/beneficiaries.
However, lump sum death benefits will form part of the estate (and therefore may be subject to IHT) when the:
- payment is made to the estate as of right (e.g. most Section 32 buyout policies, retirement annuity policies) and not at the discretion of a trustee/scheme administrator
- the member is able to give the trustees or scheme administrator a written direction to make a payment to a certain person and has complete freedom in who they choose (this is a binding nomination and is not the same as an expression of wishes).
Any benefit paid to a surviving spouse, civil partner or financial dependant will not be considered for IHT in any circumstance. Any benefit paid to the member’s estate following a discretionary decision made by the scheme administrators or trustees would not be considered for IHT either.
HMRC may also consider IHT where:
- contributions are made to pension schemes by the member or their employer in the two year period prior to the member’s death, whilst they were in ill-health. HMRC will only look at cases where an established pattern of contributions has been altered with the aim of enhancing the death benefit possibly passing to beneficiaries.
- there is a transfer of pension benefits in the two year period prior to the death of the member whilst in ill-health, either by transferring from one scheme to another or transferring the death benefits into a trust.