Inheritance tax: pension drawdown funds

Finance Bill – in a Public Bill Committee am 2:15 pm ar 5 Gorffennaf 2016.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Chief Secretary to the Treasury, Member, Labour Party National Executive Committee

The Minister will be pleased to hear that I do not have many comments on this clause, which provides that inheritance tax will not be charged if a person leaves unused funds in a pension drawdown fund when they die. In April 2015, the Government introduced changes to pension tax rules allowing people to access their pension funds flexibly from the age of 55. That flexibility, and an increase in drawdown arrangements, means that the inheritance tax charge will potentially apply to more people. The changes, which the Opposition supported at the time, meant that pensioners could access as much of their pension pots as they wanted, without having to buy an annuity. That meant, however, that if people became entitled to the funds but did not actually draw on them before death, the money would be subject to inheritance tax at the usual rate. According to the explanatory notes, that was not the original policy intention, so the clause has been introduced to correct things. The Opposition supported the changes to pension tax rules so will not be opposing the clause.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

As we have heard, clause 83 makes changes to ensure that when an individual dies, unused funds in a drawdown pension are not treated as part of their estate for inheritance tax purposes. Without the clause, a small number of pensions would be liable for inheritance tax in some circumstances, which was not our intention.

As the Committee will be aware, funds that remain in a pension scheme do not traditionally form part of a deceased’s estate and are generally exempt from inheritance tax. Nevertheless, under the current tax rules, in a small number of circumstances undrawn pension funds are unintentionally caught. For example, if an individual has designated funds for pension drawdown and then passes away without having drawn down all those funds, an inheritance tax charge may arise.

The Government introduced changes to the pensions tax rules from April 2015 that allowed more people to flexibly access their pension funds from age 55. That flexibility means that the inheritance tax charge might apply to more people who pass away leaving undrawn funds in their pension scheme. It was not intended that an IHT charge should arise in such circumstances; the clause ensures that it will not do so. It changes the existing rules so that an inheritance tax charge will not arise when a person has unused funds remaining in their drawdown pension when they die.

The changes will be backdated and will apply for deaths on or after 6 April 2011, so that they include any charges that could arise from the time when the general rule ceased to apply. The minor changes made by the clause will help to maintain the integrity and consistency of the pensions system while supporting those who have worked hard and saved responsibly throughout their lives. I commend the clause to the Committee.

Question put and agreed to.

Clause 83 accordingly ordered to stand part of the Bill.

Clause 84