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bigduckontax, Accountant
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My wife passed away in 2012. She had a pension with a

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My wife passed away in 2012. She had a pension with a previous employer, the total in the pension was £1935.63. The pension company paid me a lump sum of £1683.83 after deducting £251.80 for tax.
HMRC are saying that this is income so I need to pay more tax - I would have thought that this was part of her estate and so would be free of income tax (inheritance tax possibly but the estate was not large enough for that to be relevant.
Can you please explain the rules on this?
Submitted: 11 months ago.
Category: Tax
Expert:  bigduckontax replied 11 months ago.

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.

Customer: replied 11 months ago.
Thanks. Can you explain what 'already in issue' means?
Expert:  bigduckontax replied 11 months ago.

'Already in issue' means that the relevant pension is operational and paying out in accordance with the fund's rules governing payments.

Please be so kind as to rate me before you leave the just Answer site, .

Customer: replied 11 months ago.
Hi, the pension was not paying out, my wife was only 47 when she died and was not drating the pension. Does that make a difference?
Customer: replied 11 months ago.
That should read drawing not drating
Expert:  bigduckontax replied 11 months ago.

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.

Customer: replied 11 months ago.
OK thanks. I don't really understand why this payment would be 'the fag end'. Could you explain what GBP 1935-63 is (in layman's terms obviously) so I can better understand my position. I will definitely rate you 5/5 as you've been really good so far - I just want to get the full picture before I finish up.
Expert:  bigduckontax replied 11 months ago.

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.

Customer: replied 11 months ago.
No this would have been the full pot.So if I write and tell HMRC the following : 'My wife was 47 when she died and that the pension was not in issue so I believe the lump some should be considered in the IHT computation rather than as income.' Would that make sense?
Expert:  bigduckontax replied 11 months ago.

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!

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Category: Tax
Satisfied Customers: 3603
Experience: FCCA FCMA CGMA ACIS
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Customer: replied 11 months ago.
OK thanks
Expert:  bigduckontax replied 11 months ago.

Delighted to have been of assistance.

Thank you for your support.

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