Though it is worth bearing in mind that, if the death benefits are sizeable and are not paid to the spouse or civil partner of the deceased, that HMRC may ask for evidence that the payments were discretionary.
Questions 17 to 21 – Transfers and changes to pension benefits
Now we reach the section where the issues which were tested in the Staveley court case take on some relevance.
HMRC is asking for information which would indicate either that the deceased took an action, or potentially chose not to take an action, which:
- Led to a reduction in the value of the deceased’s estate; and
- Took place within two years of the deceased’s date of death and when they knew that they had a limited life expectancy.
When considering transfers, HMRC’s position is that although the value of the transferring pension does not enter the estate, and even where both the ceding and receiving scheme administrators have the power to exercise discretion on beneficiaries, the fact the member could have chosen to move the pension to one where they could direct where death benefits should be paid - which as we’ve already seen makes the value subject to IHT - leads to a reduction in the value of the estate.
Transfers will also create issues where the benefits are initially held under a scheme where the member can instruct where death benefits are paid to one where the trustees of the scheme can exercise discretion. The member’s state of health at the point of transfer is again key here.
HMRC’s internal guidance also indicates that there can be IHT issues if a client enters income drawdown whilst in ill-health and leaves funds within the pension, or alternatively that they reduce the amount they were already withdrawing once in ill-health.
The logic, one assumes, being that the individual could have acted to withdraw all of the funds but has omitted to do so, or in the latter case that the reduction in the level pension being withdrawn also reduces the value of the estate.
Although referenced in HMRC’s guidance, no examples of HMRC acting in this way have come to light.
Finally, if death benefits are fully assigned into a trust – a situation where the payment of death benefits to the trust was still subject to the discretion of the trustees/administrator of the scheme would not be caught by this - while the member is terminally ill, this would also be considered a declarable ‘change’ for the purposes of this section and create potential IHT issues.
Questions 22 to 24 – Contributions to a pension scheme within 2 years of death
Any contributions paid into the pension scheme in the two years before death – personal or employer – should be declared within this section.
However, the fact that one or more contributions may have been paid does not automatically mean they will be subject to IHT.
