Inheritance Tax On Uk Pensions Beware Hmrc May Look For Inheritance Tax On Your Fund!

UK Personal Pensions can fall into two camps with regard to death benefits which are largely determined pre and post retirement

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1.Un-crystallized funds (where tax free cash and/or income has not been taken).

100% of the fund within the lifetime allowance can be paid as a lump sum to beneficiaries and with an appropriate Trust can be paid prior to probate and outside the estate for Inheritance tax purposes (read on!).

2.Crystallised benefits (where cash and/or income has or is being drawn).

If the crystallised fund is an unsecured pension (income drawdown) then on death the members fund can be paid to beneficiaries minus a 35% tax charge. Or if post age 75 years on death, a 70% tax charge is made and the residual fund passes into the estate and can be chargeable to inheritance tax. Commonly a tax charge of 82% is quoted in these circumstances.

A worrying complex court case for many has a previously unforeseen consequence!

Fryer & Others vs. HMRC released on 17th February 2010 has created a dilemma for those deferring taking pension benefits post the pension normal retirement age.

People who decide not to take Pension benefits at normal retirement age thought they had the comfort of knowing until age 75 years the UK pension fund can be left and 100% will be paid to beneficiaries on death - an attractive planning tool.

HMRCs view appears to be different.

All Pensions will have a normal retirement age of anything from 55 years to 75 years old. The majority will be age 60 yrs or 65 yrs at which point a retirement benefits illustration is issued by the Pension Company or Trustee.

HMRC have argued successfully that if you defer taking retirement benefits beyond the stated retirement age then a transfer of value has taken place.

The successful HMRC argument is that by failing to take pension benefits (tax free cash and an annuity or unsecured pension) the value of assets in the discretionary trust appointing death benefits has been increased.

The judge concluded that the pension holder had a valuable right and by not exercising that right at normal retirement age it allowed the whole value to be exempt from the estate. The estate was therefore diminished and the condition for the application of Section 3 (3) IHTA 1984 had been fulfilled.

The taxable value was discounted by the judge after taking actuarial evidence but this still left over 60% of the fund subject to inheritance tax.

Interestingly there was no deliberate tax planning strategy merely the Pension holder did not need the benefits.

QROPS (Qualifying recognised Overseas Pension Schemes) and QNUPS (Qualifying Non UK Pension Schemes) have seen recent legislation specifically clarifying exemption from UK Inheritance Tax. This may appear at odds with this court case but for a non UK resident or someone considering living abroad with UK Pension funds it highlights the importance of considering these qualifying overseas pensions to reduce future tax burdens.

by: maria876

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