I retired on the grounds of ill health more than 20 years ago and receive an index-linked pension of £27,000 a year. I also have a self-invested personal pension (Sipp) valued at between £500,000 and £600,000. I am worried about breaching the lifetime allowance. I do some freelance work but do not pay income tax on the earnings as I have losses carried forward of more than £100,000. My ex-wife has a charging order on the pension of £12,000. What can I do to improve my position?
Robert Young, director and consulting actuary at Hanover Pensions, part of The Ince Group, says that as you took early retirement before so-called “A-day” (when new rules came into force on April 6 2006), your benefits have not yet been tested against the lifetime allowance (LTA), which governs how much can be saved in a pension before tax charges apply.
For the 2020-21 tax year the LTA is £1,073,100 (fixed for the next five years in the Budget in early March), so by my calculations you are already over this limit.
If you have not contributed to your Sipp since April 6 2016, you can apply for Fixed Protection 2016 to give you an LTA of £1.25m. With investment markets recovering since the start of the pandemic, you should obtain a valuation of the Sipp; if this is below £550,000, there will not be an LTA issue.
Placing your Sipp into drawdown is one of the “benefit crystallisation events” when the provider must test your funds against the LTA. This does not mean that you need take all the funds out of the Sipp. Many opt to take 25 per cent of the fund that can be drawn tax free, leaving the remainder to be drawn down as income in the future.
If your fund is more than the LTA, there will be a 55 per cent tax charge on the excess if taken as cash. The charge reduces to 25 per cent if the excess funds are retained in the Sipp for future drawdown. This charge is a standalone tax charge and is due immediately. This illustrates the need to plan ahead as funds come close to the LTA and reviewing the position on an annual basis is recommended.
Your freelance earnings must be in the same year which generated the carried forward losses, so you can offset up to the lower of £50,000 or 25 per cent of annual income. Although £12,000 is passed to your ex-wife under the charging order you pay tax on the full pension payment. The tax figure you have quoted is too high if this was your only income, so we assume you are in receipt of state pension or some other income.
If you elect to take a cash sum from the Sipp, one option would be to consider investment into non-pension arrangements, such as enterprise investment schemes, venture capital trusts and social investment tax relief, which qualify for tax relief. There is 30 per cent tax relief on investment in such arrangements so an investment of £15,000 would generate tax relief of £4,500.
Additionally, if held long enough then the proceeds can be free of capital gains tax and they can fall outside your estate for the calculation of inheritance tax. However, they are generally regarded as higher risk.
I am Irish and grew up there but have been resident in the UK since 2006. My mother passed away and left an estate. My question is to which country do I owe inheritance tax? I have taken advice in both countries, with the UK adviser saying it’s the UK, because I live here, and Irish advisers saying it’s Ireland because the assets are located there. Could you advise?
Clare Stirzaker, partner and solicitor in PwC’s private client team, says Irish inheritance tax is CAT (capital acquisitions tax), which is charged at 33 per cent on gifts and inheritances. By virtue of the inheritance being passed to a child, you have a tax free allowance of €335,000 (assuming it is not already used on prior gifts or inheritances from a parent). Unlike in the UK, as the beneficiary you are responsible for paying CAT.
On any inheritance in excess of €335,000, CAT is charged where the provider and/or the beneficiary is resident or ordinarily resident in Ireland at the date of disposition. This means that unless your mother was not resident in Ireland at the time of her death, CAT will be payable in Ireland.
Gifts or inheritances of property situated in Ireland are taxable regardless of the domicile, residence or ordinary residence of the beneficiary, so to the extent that you inherited property from your late mother, this will be taxable in Ireland regardless of her or your residence or domicile.
In contrast, UK inheritance tax (IHT) is determined only by the domicile of the deceased and not the beneficiary, and payable by the estate of the deceased and not the beneficiary. Given that you have said the assets are located in Ireland, they would, therefore, only be subject to UK IHT if your mother was UK domiciled or deemed domicile at the time of her death. From what you have told us, that you grew up in Ireland, this seems unlikely to be the case, but it is important to establish this.
Going forward it is important to consider your own domicile to determine how your estate will pass upon your death. Having been in the UK since 2006, it is likely that you have or are about to become UK deemed domicile for the purposes of IHT tax, having been resident for 15 out of the last 20 tax years in the UK.
As discussed above, this would bring your entire worldwide estate into the scope of UK IHT, including any assets you now own in Ireland. As discussed above, real property located in Ireland is taxable there regardless of domicile, so this situation may attract double taxation. You may wish to take further professional advice on this point and pay particular attention to the terms of your wills either in the UK or Ireland.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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