In this article Julia Peake, Technical Manager picks some topical technical questions the Nucleus technical team have received recently, which may be of interest to you.
Question 1: Leaving pension assets to charity
With the upcoming changes to unused pensions funds being subject to inheritance Tax (IHT), can we get your thoughts on leaving pension assets to charity after 6 April 2027, and how that might impact the IHT position?
Answer 1: There are strict conditions relating to a Charity Lump Sum Death Benefit (CLSDB). The scheme member needs to nominate the charity and there need to be no dependants at date of death. If so, it can qualify as a CLSDB and will be free of income tax, and IHT after April 2027.
If it didn’t qualify as a CLSDB, then the tax would depend on when death occurs, and the tax status of the beneficiary involved.
If the money were left to a charity, it would be liable to income tax if death is on or after age 75 or under 75 but paid after two years. If death occurs before age 75 and within two years, then this should be income tax free. As a charity is an entity, income tax would be a flat rate of 45%. It should still be free of IHT, however, in the draft legislation there is a provision which may mean, in specific and limited circumstances, that IHT may be an issue but generally it should be free of IHT.
Question 2: Mistake in transitional tax-free amount certificate
If the client mistakenly makes an application for a transitional tax-free amount certificate (TTFAC), but they realise this amount is lower than the standard 25%, can this be ignored and the standard 25% used?
Answer 2: The legislation says once a TTFAC has been produced it generally can’t be revoked. The only exception to that is if there is a mistake in the information on which the TTFAC was based (e.g. previous LTA used information was incorrect).
Question 3: Tax free cash withdrawal
There are lots of rumours again around the limiting of tax free cash (TFC) from pensions which could be announced in this year’s Budget. Can you please explain what cancellation rights the client has if they enter into drawdown and take maximum tax free cash as they think this might reduce post Budget.
Answer 3: HMRC and FCA have confirmed that the tax legislation doesn’t allow for any tax-free lump sum, paid as part of a designation to drawdown, to be returned.
If a customer cancels their drawdown instruction after receiving TFC, the lump sum amount will no longer be considered authorised. Meaning it’ll be treated as an unauthorised payment and subject to a tax charge of up to 70% on that lump sum.
Question 4: Discretionary trusts and hold-over relief
We are experiencing a significant uptick in clients looking at estate planning advice, in light of upcoming tax changes. Therefore we are looking at discretionary trusts and looking for clarification on the following:
- When putting property into a discretionary trust, can you apply for Hold-over relief?
- What is the criteria to be eligible for Hold-over relief?
- How long does a discretionary trust normally last and how are these wound up?
Answer 4: Firstly this is an area of complex tax planning and so it’s important to speak to a regulated tax adviser if people are looking at making a claim for Gift
Hold-over relief. Also, if looking to put property into trust there are some additional considerations that are required especially if this is a main residence, please see:
How to Transfer Property into a Trust in the UK | Step-by-Step | Tilly Bailey & Irvine
Hold-over relief allows individuals to postpone paying capital gains tax (CGT) on certain gifts of assets. The two primary CGT Hold-over relief provisions within the Taxation of Chargeable Gains Act 1992 (TCGA) are:
- Section 165: Relief for gifts of business assets
- Section 260: Relief for transfers subject to immediate Inheritance Tax (IHT) charges.
Hold-over relief is available if the disposal is a chargeable transfer for Inheritance Tax purposes and where the transfer is made by an individual or the trustees of a settlement, to an individual or the trustees of a settlement. No relief is available for transfers to the trustees of a settlor-interested settlement.
The claim for Hold-over relief must be:
- A joint election by donor and donee.
- When assets are transferred to a trust, only the settlor needs to sign
- Trustees must sign if there is a claim to defer agreement of valuations
- For the donor: The chargeable gain is reduced by the amount held over
- For the recipient: The base cost of the asset is reduced by the gain held over
- This ensures the gain is not eliminated but merely deferred, with the tax liability effectively passing to the recipient of the gift.
Please see here for further information: HS295 Relief for gifts and similar transactions (2024) – GOV.UK
When it comes to how long a trusts lasts for and what happens at the end, this will depend on the laws under which the trust is based. Under English and Welsh Law, for trusts created after 5 April 2010, the maximum duration is generally 125 years, as dictated by the Perpetuities and Accumulations Act 2009. Trusts can end sooner if assets are sold. If looking to wind up a trust, then tax and legal advice should be sought so the trustee can understand the reporting requirements, taxes, and distribution responsibilities to the beneficiaries.
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