For example:
Gross distribution Article continues after advert | £5,000 |
Beneficiary receives | £2,750 |
Tax credit (45 per cent) | £2,250 |
The scheme administrator will provide the trustees with the relevant information that they must pass on to the beneficiary for them to make the claim. The beneficiary must then account for the gross amount of lump sum death benefit in their self-assessment return, or they can use the R40 repayment claim form.
Where the tax paid exceeds the total income tax liability for the year, HM Revenue & Customs will repay the difference.
Price of control
Although the tax credit is designed so that the tax on the lump sum death benefit is paid at the individual’s marginal rates, as if they had received the payment from the pension scheme directly, the control the trust gives will come at a cost.
There is no time limit for onward payment of the lump sum death benefit from the trust to the individual. However, the lost compound growth on the 45 per cent paid to HMRC when the death benefits are transferred to the bypass trust will become increasingly larger than the 45 per cent tax credit that can be claimed when payments are eventually made to beneficiaries.
Whether it is a cost worth paying will be down to individual circumstances.
Lisa Webster is senior technical consultant at AJ Bell
