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THE INVESTOR
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New legislation aimed at modernising and
simplifying inheritance rules came into effect at
the start of October. The most significant change
relates to those who die intestate, that is, without
leaving a will.
The old rules placed significant restrictions on
the amount that a spouse could inherit if their
partner died leaving children, parents or siblings
behind.Where there were surviving children, the
spouse was entitled to a statutory legacy of just
£250,000 plus personal chattels and a life interest
in half the remaining estate, with the children
taking the other half. Under the Inheritance and
Trustees’ Powers Act 2014, the spouse will now
be entitled to half the estate absolutely, rather
than as a life interest – the right to receive income
from the assets during their lifetime – with the
children taking the other half.
In situations where there are no children but
there are surviving parents or siblings, the old rules
stipulated that the spouse was entitled to half the
estate and the remainder was divided between
In his speech at the Conservative Party conference,
George Osborne revealed details of a change to
the taxation of pensions death benefits; a move
that looks set to save hundreds of thousands of
families tax totalling £150 million each year.
The latest measure will abolish a 55% ‘death
tax’ on inherited pension benefits, enabling many
savers to pass on their pensions to loved ones
tax-free.The announcement was the second part
of proposals in this year’s Budget.
The move comes alongside plans to give
members of defined contribution pension schemes
unrestricted access to their retirement savings
from the age of 55. Under existing rules, it is only
possible to pass on your pension fund tax-free if it is
‘uncrystallised’ – in other words, untouched and still
held in the fund – and only if death occurs before
the age of 75. Lump sum death benefits from
‘crystallised’ defined contribution pension schemes,
i.e. those from which benefits have already been
taken, are subject to a 55% tax charge.
In broad terms, under the new regime,
when someone dies before the age of 75, the
beneficiaries of their crystallised or uncrystallised
pension fund won’t be taxed at all.This applies
whether the beneficiaries take the pension fund as
a lump sum or as income.
When someone dies over the age of 75 –
the more likely scenario based on longevity
– beneficiaries will be able to take the residual
inheritance
new legislation means changes to intestacy rules
Restrictions lifted for spouses of those who die without leaving a will
pensions
Demise of ‘death tax’
The Chancellor’s latest pension change may be his most generous move for families yet
parents and siblings. Under the new regulations,
the spouse will no longer have to share assets,
but will be entitled to the whole estate.
The new act also introduces a new definition
of chattels, adding property held at death solely
as an investment to the two existing definitions –
tangible movable property except for money or
securities for money, and property which was
used at the death of the intestate person solely for
business purposes.The business property definition
is also widened to cover property mainly used for
business, which may be a useful extension.
Other changes introduce protection so
that children who are adopted do not lose
their inheritance, and give greater powers to
unmarried fathers.
The new regulations are a welcome addition
to inheritance laws. Far more important, however,
is to ensure that your estate is distributed in
accordance with your own wishes, rather than the
state’s intestacy provisions. That means ensuring
that you make, and regularly update, a valid will.
pension fund as a lump sum subject to a tax
rate of 45%, instead of the current 55% tax
rate.Alternatively, they can continue to draw the
income and instead pay their marginal rate of tax,
as they would with their own pension.
Importantly, the new rules extend the tax-
saving opportunity beyond spouses and other
financial dependants to any beneficiary, including
grandchildren.The changes will benefit those
who haven’t yet taken their pension, or who have
already entered income drawdown.They do not
apply to annuity payments or final salary schemes.
The details are yet to be firmed up, but the
measure is due to come into effect from next April
alongside the other pension reforms outlined in
the Budget.
