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Where Taxpayers and Advisers Meet

Taxation of trivial cash lump sum of spouse's pension

Posts: 1
Joined: Thu Apr 12, 2018 3:42 pm

Taxation of trivial cash lump sum of spouse's pension

Postby Doubletaxed » Thu Apr 12, 2018 4:14 pm

Hi, I'll try to keep this brief!
Background: my wife and mother of my children (from whom I was separated for c.8 years) recently died. She made a Will leaving everything to our kids, but sadly as she did not sign it, it is invalid, thus the rules of intestacy apply, which effectively pass everything to me as her surviving spouse. I fully respect her wishes and am passing everything to our kids via a Deed of Variation.
She left very little cash but had a few work pensions. Most of these were DC schemes and have paid out the death benefit in the form of a tax free lump sum, which I have passed on in full. One of her Defined Benefits company pensions offered no death benefit but a spouse's pension, and as the monthly sum was fairly small, we took the option of a trivial cash lump sum, which was taxed at source at 20%. Here's the rub: I'm a higher rate taxpayer, so I'm concerned that this lump sum will attract a further 20% tax when I submit my next tax return, even though I've made a legitimate Deed of Variation and have seen none of the cash. It looks like the rules surrounding DoVs allow only amendments to IHT or CGT position, not Income Tax. Does anyone have any experience of this?

Posts: 7450
Joined: Wed Aug 06, 2008 3:25 pm

Re: Taxation of trivial cash lump sum of spouse's pension

Postby maths » Sat Apr 14, 2018 9:02 pm

Presumably the pension was payable to you on spouse's death and in view of its amount you (the spouse) decided to commute it for a small lump sum. This was not an inheritance under the will. A DoV simply allows a beneficiary under a will to redirect the inheritance without IHT or CGT effects for the person executing the DoV.

If you gifted the sum to the children that would not affect any additional income tax you might be liable for as a higher rate taxpayer.

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