There has been much discussion about HMRC’s ability to treat a pension scheme as within a client’s estate on death if they have transferred in the two years prior. Here we briefly look at when this may apply.
Historically, HMRC has tended to look at any transactions made within two years of the date of the death of a client with suspicion. For example the refusal to take benefits at selected retirement age may have been seen as an ‘omission to act’. The omission rules were designed to cover scenarios where a client was deemed to have deliberately deferred or amended benefits from a pension scheme due to ill health primarily to increase the death benefits that would be paid from the pension. The omission rulings were dropped in 2011 and so generally no longer apply – although, like all-things-Revenue, there may be exceptions!
The main point that HMRC will look at that is still very relevant – and possibly more so today with the increased flexibilities offered encouraging people to transfer – is transfers within two years of death. HMRC has determined that in many circumstances people have transferred benefits as they approach death for no other reason than to enhance the death benefits available (for example, a final salary scheme may only offer a spouse’s 50% annuity whereas a personal pension may offer a full return of fund). In HMRC’s view this may deprive them of funds which may end up within the client’s (or their spouse’s) estate.
To this point they make a statement in the Inheritance Tax Manual that upon transfer within two years of death, the right to determine the terms of payment of death benefits within the receiving scheme lies with the estate (i.e. the client). HMRC determines that the client could make the election to pay benefits to their estate up to the point of death. If this direction of payment has not been made by the point of death this could be seen as a loss to the estate upon death as this election could have been made. This is the position for clients who have made transfers and die within two years.
More information can be found in this HMRC manual.
The details of the transfers need to be captured in form IHT409, which is a supplemental form to the IHT400 main form. This document asks about different scenarios, such as continued pension payments after death, lump sum payments and transfers. The transfer section requires notes to be filled in on the main IHT400 form and it appears to be from these notes that HMRC will decide whether or not there will be a deemed loss to the estate.
Unfortunately there is little detailed information about the full process and how they ultimately make a decision as to what is deemed to be inside or outside of the estate for IHT calculations.
This is primarily designed to catch those individuals who are looking to transfer benefits whilst in ill health for enhanced or more flexible death benefits but may well also catch those individuals who are looking not so much to enhance benefits but rather get ‘all their ducks’ in order before death so that payment of benefits can be seamless for their surviving spouse. For these reasons clients need to be very aware of the potential effects of death within two years of a pension transfer.