In last year’s Autumn Statement, the Chancellor announced that, from 6 April 2015, beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive any future payments from those policies tax-free.
In broad terms, this can be regarded as an extension of tax relaxations recently announced in relation to lump-sum death benefits. Those changes do not affect either the inheritance tax or lifetime allowance (LTA) positions, but they do ease the burden of the current 55% ’special tax charge’.
For payments made before 6 April 2015, the current law continues to apply as follows. If the member dies before reaching age 75, the question of whether there is a special tax charge depends on whether the lump sum is tested against the member’s LTA.
If the benefit is tested against the member’s LTA, then it does not attract a special tax charge. If the benefit is not tested against the member’s LTA, then the special tax charge applies. The charge applies to lump sums on death after reaching age 75. Where the charge applies in any of these circumstances, it is calculated as 55% of the lump-sum death benefit.
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But when the reforms come into force, for payments made on or after 6 April 2015, the position will be as follows. There will be no special tax charge on death before age 75, but the charge will apply to lump sums on death after reaching age 75.
For the 2015/16 tax year, the special tax charge will be reduced to 45% from its current rate of 55% of the lump-sum death benefit, and for subsequent tax years, no single uniform rate of special tax charge will apply, but instead the benefit will be taxed as income at the recipient’s marginal rate.
These changes do not apply to those specific types of lump sum, which are typically characterised as trivial (because of the level of benefits involved), or which are termed ’charity lump sums’. The special tax charge does not apply to those benefits.
No one could describe this as straightforward, but the changes do make matters a little simpler for post-5 April 2015 payments, and in some cases will reduce the tax burden.
Richard Kandler is a senior pensions lawyer at Linklaters