Where a person in serious ill health makes a transfer of a pension plan this can, in certain cases, lead to a chargeable lifetime transfer for IHT purposes. However, for those aged 55 or over, special rules apply to quantify the size of the chargeable transfer.
In cases where an individual transfers from one pension scheme to another and dies within 2 years of the transfer, HMRC takes the view that, in certain cases, the pension transfer may have given rise to a lifetime transfer for IHT purposes.
In essence, this could be a problem where:-
• the individual dies within 2 years of making the transfer
• at the time of transfer, the member knew he/she was in serious ill health and
• it is not possible to demonstrate that, in making the transfer, the scheme member had no donative intent to others
If it is possible to show that there was no donative intent, the defence in section 10 IHTA 1984 will apply (no intention to confer a gratuitous benefit). This, for example, would be the case if the member was clearly only acting for himself and so immediately encashed the plan following transfer or had in place a plan for a regular systematic encashment. The Staveley case (on which we understood HMRC intend to make an appeal) is an indication of HMRC’s resolve to only allow the section 10 defence in very specific cases.
HMRC will collect information on “vulnerable” pension transfers via the form IHT 409 – the pensions supplement to the Estate Return on death (IHT 400). Not everyone will complete an IHT 400. For less complicated estates, which are termed “Excepted Estates” (assets of less than £1 million which pass mainly to a spouse/civil partner or charity), the legal personal representatives (LPRS) can complete the short form IHT 205. However, if an “offending” pension transfer is involved, the LPRs will need to switch over to using the longer form IHT 400.
For people who transfer at an age when they can draw benefits, the process for calculating the IHT transfer of value has, in the past, been complex. This involved determining the value of the pension scheme rights that the scheme member has the ability to give away and deducting the value of retained rights to which he/she is entitled immediately before death. This would typically be the right to the PCLS and the present value of any guaranteed annuity. Assumptions need to be made for future investment growth and the discount issues that arise with the purchase of such a financial product for notional purchasers.
Fortunately, the days of some of these complications may now be numbered.
In cases where an individual transfers to a pension plan that offers flexible access and that individual is aged 55 or over, we understand that HMRC will now be open to a valuation of retained rights on flexi-access principles. So, for example, the retained rights of an individual will be the entitlement to the PCLS and the residual encashment of the balance of the fund after income tax. This will, we believe, considerably reduce the likely transfer of value in many of these cases and so, even if clients are caught, transfers of value are more likely to fall within the available nil rate band.
Example – Oliver
Oliver aged 61 makes a pension transfer with a CETV of £1 million. At the time he makes the transfer he knows that he is suffering from pancreatic cancer and he has a life expectancy of one year. He unfortunately dies 8 months later having not encashed any of his pension fund.
Oliver’s LPRS will need to report the transfer in Boxes 17-21 of the form IHT 409. It is extremely likely that HMRC will take the view that an IHT transfer of value arose when Oliver made the pension transfer.
Let’s say that the value of rights before the transfer (taking account of assumed investment growth and appropriately discounted) that is agreed is £950,000.
The net transfer of value will need to take account of retained benefits. On the basis that Oliver had other taxable income on his death of £100,000 these would be calculated as follows:
|Value of retained rights
The transfer of value for IHT purposes will therefore be £285,000 (£950,000 less £665,000). Indeed as this is a chargeable lifetime transfer (CLT), annual exemptions of up to £6,000 may be available to reduce the value of the CLT still further.
If Oliver had predeceased his wife and had not made any CLTs/failed PETs in the last 7 years, all of this notional chargeable lifetime transfer will fall within his nil rate band and so no immediate IHT will be payable. It will, however, mean that there will be less of a transferable nil rate band available for his widow.
Of course, in the old days the value of retained benefits could, in appropriate cases, be treated as a lifetime transfer of value immediately before death under the “omission to exercise a right rule” in section 3(3) IHT Act 1984. As regards uncrystallised pension rights that rule was abolished by amendments to the IHT legislation in the Finance Act 2011. Furthermore, it no longer applies to crystallised pension rights following changes made in the Finance Act 2016.
As tax year end approaches, there is still time to make use of your available reliefs and allowances.
This tax year end planning checklist covers the main planning opportunities available to UK resident individuals and will hopefully help to inspire action to reduce tax for the 2023/24 tax year and to plan ahead for 2024/25.
As tax rate band thresholds are changing, understanding the impact on high rate taxpayers and the economy is crucial.
It was recently revealed in the media that the amount we need to enjoy a ‘moderate’ retirement has increased by £8,000 per annum, a 38% increase, in just one year.