Tax-free loophole closed

New rules apply to the estates of pension scheme members

A loophole which allowed pension funds to be passed on tax-free at death has now been closed. The announcement made by the chancellor Mr Darling during his first Budget speech has clamped down on the schemes and tax will now apply to the estates of pension scheme members who die on or after April 6 2008.

Providers of small self-administered pension schemes (SSAS) had been marketing them as a way for people to pass their pension funds on to their family without incurring tax. The schemes have typically been used by companies to provide pensions for directors and other senior employees.

The new rules will treat any increase in the pension rights of one member following the death of another as an unauthorised payment, and apply a 70 per cent tax charge to it. The same level of charge already applies to funds passed on via an alternatively secured pension.

The amount passed on will also be liable to inheritance tax, bringing the potential taxation to 82 per cent.

However, the charge will not apply if the scheme has 20 or more members and the funds arising following a member's death are evenly distributed among all other members of the scheme.

Levels and bases of, and reliefs from, taxation are subject to change.