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Hello,
Trying to assist a colleague who received an lump sum which came from a parents pension upon their death. They believe that what they received had already had a decent chunk taken off it for tax purposes. However they apparently now owe HMRC ~£4k and its being taken off every month in instalments and causing them considerable stress in being able to afford daily life.
I'm confused on a couple of aspects on this: 1 - how would HMRC determine that a lump sum hitting an account is eligible for tax and link it to a change in tax code? 2 - quick google suggests that money from a pension code is outside of inheritance tax and but tax should be paid on it? and if that's correct why did a chunk disappear before they received it?
Assistance from the hive mind appreciated as to what they would need to gather as evidence/proof to fully understand the situation and then how to go about clarifying with HMRC. I've got them going on getting setup with a .gov account etc.
Cheers
Whether tax is due on the payments from the pension also depends on the age of the deceased I believe?
Good to know, i will enquire
from 'tinternet "If death occurs before age 75, no tax applies; if after age 75, the beneficiary pays Income Tax at their own marginal rate"
That's interesting Tony, i'm pretty sure the parent will have been under 75 so there would be a requirement to pay something. I'm still intrigued on how it was identified as tax eligible against any other lump of money hitting their account. but maybe thats happened upstream.
If they got a lump sum and they owe a percentage of it, how are they financially struggling (genuine question, not trying to be smart). Unless they spent it all on depreciating assets, isn't there some way of arranging their finances so they are no worse off than before they received the lump sum whilst they pay off the tax burden?
Just a couple of thoughts from recently dealing with similar, inheritance tax on pension can depend on if pension was discretionary or not & also if paid out after 2yrs from date of death can be liable to income tax.
IME you can be taxed on a pension lump sum. The pensioner either pays the tax owed as a single payment or at a reduced PAYE tax code for life; it may be that inheritance causes the full tax to become due if it was arranged via PAYE
Without reveling too much in terms of values, it wasn't a life altering amount of money, cleared some debts/student loans and sorted some new windows so its been absorbed. However the knock on from the combination of some sick leave and the extra tax per month is squeezing them currently.
Given some of the comments so far i have sent them off to get all the details on the specifics of the inheritance over the weekend so i can see if there is any way to help
They believe that what they received had already had a decent chunk taken off it for tax purposes.
Well, they definitely need to confirm this one way or the other, presumably via the Executor.
Some wills are written that any tax due is paid by the deceased, then the gifted sum really is a gift and doesn't stress out the recipient. I know it's too late in this case but others may like to know.
Depends on how generous the will holder is.
The will is broadly irrelevant when it comes to pension death benefits, certainly in terms of taxation on death.
The most likely explanation is parent died at 75 or over, therefore death benefits taxable on the beneficiary as income (not IHT).
There’s possibly one or two other possibilities that don’t immediately spring to mind.
I'd say they need to speak to the executor and see the estate accounts to see exactly where the money is from and how it was dealt with..
Some wills are written that any tax due is paid by the deceased, then the gifted sum really is a gift and doesn’t stress out the recipient. I know it’s too late in this case but others may like to know.
Depends on how generous the will holder is.
my understanding is that is always (or at least ordinarily) how it works and has nothing to do with the generosity of the “will holder”. A cynical person might say it’s because HMRC have far more chance of getting it from the executors than the beneficiaries but a realistic might say that the beneficiaries may have no idea if the estate qualified for IHT or not.
the simple answer for the OP - nobody can possibly know without “all” the facts.
They’ll pay income tax on the sum, but no IHT is due. A more life-changing lump sum can lead you into a pension allowance liability that causes tax to be due. Bonuses can be an issue at the end of the financial year, or overtime, that pushes over the allowance (see nhs consultants passim). This sounds more like simple income tax.
They should speak to the pension company, if they taxed it at payment they'll have the details. Depending on age (as above) and amounts it can be taxed.
They have probably then been put on a tax code as if they'd get that amount every year. This _should_ get caught at the end of the tax year and refunded.
They can check all this logging into their HMRC account and update HMRC if they need the tax code adjusting back (and that's correct).
Just been through all this with my mum following the death of my father (last tax year, the refund for the extra tax only recently came through).
TLDR: they should log into their HMRC account, look t the tax paid, tax codes, understand it, and contact HMRC if it's wrong. You can update expected earnings for the year. If something doesn't make sense, call the pension company that took the tax. The HMRC stuff is straightforward if they're numerate, if not very numerate ask a friend to help, or call HMRC (or web chat) they're pretty good at helping.