Inheritance tax may be charged on the deceased's pension pot which has not been used to buy an annuity by the age of 75 under HMRC proposals contained in its discussion paper 'Inheritance tax and pension simplification' published on 21 July 2005. See Update article 'IHT and pensions', Taxation 28 July 2005, page 453.
HMRC's proposals are intended to stop tax driven inheritance tax mitigation under the new simplified pensions rules due to come into force on 6 April 2006 (A-day) which allow far more flexibility over the purchase of annuities. HMRC are concerned that individuals may use the new flexibility to build up assets in a pension fund, fail to take a pension income and pass on the fund as an inheritance tax free lump sum to their beneficiaries.
If HMRC's proposal were to be adopted, some are concerned that it would be another consideration for executors administering estates. John Wray, solicitor in Wedlake Bell's private client team, said that the administrators of affected estates 'will effectively have to prove that increasing the pot available for transfer to their beneficiaries was not the motivation behind the deceased's decision not to take up a traditional pension income'.
However, Mike Warburton, senior tax partner at Grant Thornton, says that he is 'not surprised that HMRC want to restrict the use of the new rules for inheritance tax purposes'. The Government is bringing in some 'very generous new pension rules' in 2006 and 'it is desperate that the new rules will not be used for tax avoidance'.