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Pensions

Getting technical

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Open-access content Wednesday 20th May 2020 — updated 10.55am, Friday 27th November 2020
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Technical Connection respond to questions on capital gains tax and pension drawdown

Q My client inherited assets within the last 12 months and is considering a deed of variation to pass some assets to his brother. The value of one asset has increased significantly since death. Can you explain what the capital gains tax (CGT) position is?  

It is possible for the client to enter into a deed of variation within two years of death. For inheritance tax purposes, it is vital that the necessary conditions are satisfied for the variation to be treated as having been made by the deceased – broadly, the variation must be made within two years of death, it must be in writing, it must contain a statement that section 142 of the Inheritance Tax Act 1984 applies and it must not be for consideration. One implication of executing a deed of variation is that the original owner will be treated as making a disposal and if the gain arising since death exceeds the annual exemption, CGT can become payable.

To avoid an immediate CGT liability, it is possible for the variation to contain an election for CGT purposes, which broadly would shift the gain to the recipient beneficiary. For example, let us say shares in a collective investment were worth £200,000 at the date of death but are now worth £250,000. If no election is made, this could trigger a disposal of the collectives with CGT based on a capital gain of £50,000. Alternatively, by including an election for CGT in the variation, the acquiring beneficiary could secure an acquisition cost of £200,000 (the value at the date of death) with no immediate CGT liability. However, that original gain would stay within the collective investment portfolio.

It is important to note that the client will need to seek professional legal advice in respect of carrying out this planning, so all of these options will be explained to them at that time.

Q In 2019/2020, £20,000 was paid into a personal pension by my client’s employer. Following this payment, the client took some income (above the PCLS) using flexi-access drawdown. He has some unused annual allowance from all three of the preceding tax years. Can he still utilise the unused annual allowance from the previous tax years, or will the employer contributions be subject to an annual allowance charge?

Once the money purchase annual allowance (MPAA) is triggered, carry-forward is not available for further defined contribution payments, so the previous years’ allowances have now been lost.

The MPAA is triggered at the point the first flexible income payment is paid. Therefore, assuming the client is not subject to tapering, as all the employer contributions were paid before the MPAA was triggered there would still be scope for £4,000 of contributions in the remainder of the tax year before an annual allowance charge would apply

Image credit | iStock

These are actual questions and answers taken from the Technical Connection Techlink Professional question bank. Chartered financial planners can find out more about a trial subscription to TechWise by visiting: www.techlink.co.uk/techwise

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This article appeared in our SUMMER 2020 issue of Personal Finance Professional.
Click here to view this issue
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