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Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.
HMRC are, regrettably, correct. Any benefit derived from an existing pension scheme where the scheme is already in issue is taxable as income in the recipient's hands. It would not form part of your wife's estate on decease. This income would be taxable in the tax year of receipt, but the deduction was at about 15%. I can only assume that the pension scheme was using your late wife's data in their computations. You will, if you are taxed at basic or higher rates, owe some additional money to HMRC.
Any unused tax free 325K from your late wife's estate can be used against your estate in addition to your own 325K giving a possible 650K exemption from Inheritance Tax (IHT).
I am so sorry to have to rain on your parade.
'Already in issue' means that the relevant pension is operational and paying out in accordance with the fund's rules governing payments.
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Right, then it is possible that the lump sum should be regarded as part of her estate. However, if her pension pot was rolled into the IHT computation and this payment merely the fag end as it were then indeed the treatment assessed by HMRC would be correct. I would suggest that you write back to the HMRC office concerned pointing out the position and requesting that the GBP 1935-63 be included in IHT totals. After all, they can only say no and you will be in no worse a position than you were before.
It will all depend upon the pension schemes rules. It is possible that the full pot was included in the IHT computation, but then the pension provider found a bit more somewhere. It i not an unusual occurrence. Personally In have some GBP 420 sculling around which arrived literally years after my pensions were crystalised into annuities or 25% payouts.
Yes, indeed, be prepared for a long haul though as your correspondence rises through the layers in the tax office until it reaches an official who can actually understand the point you are making!
Delighted to have been of assistance.
Thank you for your support.