The Finance Bill currently going through Parliament will make some significant changes to the tax treatment of lump sum death benefits.  As previously announced, lump sum death benefits which would currently attract a flat rate tax charge of 45% (eg where the deceased was over 75) will, if paid to an individual on or after 6 April 2016, generally be taxed at that individual's marginal rate of income tax. (The flat rate 45% tax charge can still apply in some circumstances, for example if payment is made to a discretionary trust.)

Most types of lump sum death benefit can be paid tax free if the deceased was under 75, provided the lump sum is paid within 2 years of the date when the scheme administrator first knew (or could reasonably be expected to have known) of the death.  This will continue to be the case, but the Finance Bill will make an important change to the tax treatment of "defined benefits lump sum death benefits" (ie lump sums of a defined amount such as 3 x salary) where the 2 year time limit is breached.  Currently, such a lump sum paid outside the 2 year time limit will be taxed as an "unauthorised payment".  For payments made on or after 6 April 2016, the tax consequence of breaching the 2 year limit will be that the lump sum will be taxed as if death had occurred over 75 (generally resulting in the lump sum being taxed at the individual recipient's marginal rate of income tax) but the lump sum will not be an unauthorised payment.

Trustees dealing with death benefit cases where (a) the deceased was 75 or over; or (b) the deceased was under 75 but the two year time limit for paying the benefit tax free has expired, should consider whether to wait until 6 April 2016 before paying the lump sum.