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Matthew Hutton MA, CTA (fellow), AIIT, TEP looks at the Inheritance Tax position of registered pension schemes.

Context

Property held within a registered pension scheme is prevented from being ‘relevant property’ under the relevant property regime (IHTA 1984 s 58(1)(d)). That statutory protection ceases once funds are released from the scheme following the death [of a member].

The Two Year Period of Grace: Change in HMRC Practice

HMRC have allowed a ‘grace period’ of two years following the death for the freedom from the relevant property regime to continue, on the footing that the funds will be distributed during that time free of IHT (HMRC’s Inheritance Tax Manual IHTM 17123).
 
While in some cases the trustees of a pension scheme will simply make outright payments of capital to beneficiaries, the deceased may well have set up his own trust to receive the benefits, in which case the two-year period extends to the recipient trust. However, there can be a trap in such a case: suppose the pension trustees advance capital to the recipient trust twelve months after death, the two-year protection then ceases in the hands of the recipient trust and so the funds will fall within the relevant property regime from that time (see IHTM 17124). 

The interpretation at IHTM 17124 represents a change in HMRC practice. It notes that if the trustees:

 ‘...exercise that discretion by paying the death benefits to a private trust, that trust will be the subject of the normal IHT charges which apply to the mainstream discretionary trust. It follows, for example, that any subsequent distributions from the recipient trust will be chargeable to IHT even if made within the balance of the two-year period following the member’s death.’ 

However, if by contrast the pension scheme trustees have no discretion and must pay death benefits to an individual’s trust established by the member, funds in that trust should remain comprised in the pension scheme for purpose of IHTA 1984 s 58(1)(d) and so the normal two-year rule should apply.
 
It is conceivable that flexible interest in possession trusts might have been written, pre-22 March 2006, in relation to a death benefit. If the beneficiary dies before the life assured, the actuarial value of the beneficiary’s share in the policy will form part of his estate for IHT purposes. While the interest in possession might be subject to a flexible power of appointment, that will not help if the power has not been exercised at the date of death.
 
Once death benefits have entered the relevant property regime, the IHT payable on either an exit or at a ten-year anniversary in relation to such funds follows the normal rules.

(Hutton on Estate Planning 11.5.5(e))

Can Pilot Trusts Mitigate the IHT Ten Year Charge, Going Forward?

This is something I have been discussing with Robert Chalmers of Kester Cunningham John, a Norwich MTR delegate; in particular, whether the establishment of a number of pilot trusts among which the death benefits would be appointed by the trustees within two years after the death would be effective to create a number of discrete IHT paying funds. Given that the trusts would be established after the individual became a member of the pension scheme, the answer must be no, because of IHTA 1984 s 81. This is clarified by HMRCs Inheritance Tax Manual at IHTM 17126 as follows:

IHTM 17126 - IHT charges on pension schemes as settled property: the ten-year charge where death benefits are settled on discretionary trusts

Where the death benefit (IHTM 17030)

• is payable under the scheme rules to the member or their estate (in other words, where there is no initial discretionary trust under the scheme rules), and
• it is then settled by the member during their lifetime or by their Will (IHTM 12041)

the first ten-year charge after death is calculated from the date the member set up the trust.

Where, however, the death benefits

• are held on discretionary trusts from the start, and
• on the deceased's death they are paid to a new discretionary trust

they are effectively moving from one discretionary trust (the original pension scheme) to another discretionary trust (the recipient discretionary trust). In this instance IHTA 1984 s 81 applies for setting the date of the ten-year charge. Under s 81 the date for the ten-year charge is the date the member first joined the original pension scheme. Although treated as remaining in the original discretionary trusts for ten-year charge purposes the funds are held on the trusts of the recipient settlement for all other purposes.

Example

• X becomes a member of a pension scheme on 15 May 1964; the death benefits are to be paid under the trustees’ discretion; this therefore is the ‘initial discretionary trust’.
• X sets up a (new) discretionary trust on 2 March 1998 to receive the death benefits.
• X dies on 3 January 2000.
• The death benefit is paid to the new trust under the trustees’ discretion on 4 September 2000.

No Inheritance Tax charge arises at this stage (IHTM 17123) in view of IHTA 1984 s 151 and IHTA 1984 s 58, but the property becomes ‘relevant property’ at this point.  X is deemed (IHTM 17125) to be the settlor of the funds in the pension scheme and s 81 applies so that the ten-year charges for the new recipient trust arise on 15 May 1984, 15 May 1994 and 15 May 2004.

• The 15 May 1984 and 15 May 1994 ten-year charges would be nil as the death benefits were not relevant property at that time.
• The death benefits became relevant property on 4 September 2000 - this would be reflected in the rate of tax under IHTA 1984 s 66(2) for the 15 May 2004 ten- year charge.

What is MTR?

MTR is a 90 minute monthly training course, held in London, Ipswich and Norwich – as well as a reference work. Each Issue records the most significant tax developments over a wide range of subjects (see below) during the previous month, containing 30 to 40 items. The aim is not necessarily to take the place of the journals, but rather to provide an easily digestible summary of them and, through the six-monthly Indexes, to build up, over the years, a useful reference work. 

The first aim, therefore, of MTR is to inform. The second and subsidiary aim is to provide a monthly forum for the discussion of issues that tend to come up in professional practice, largely, though not exclusively, prompted by specific items in MTR.

Who should come to MTR? Does it attract CPD?

MTR is designed not primarily for the person who spends 100% of his/her time on tax, but rather for the practitioner (whether private client or company/commercial) for whom tax issues form part of his/her practice. Attendance at MTR qualifies for 1.5 CPD hours for members of the Law Society, for 1.5 CPD points for accountants (if MTR is considered relevant to the delegate’s practice) and (subject to the individual’s self-certification) should also count towards training requirements for the CIOT. For STEP purposes, MTR qualifies for CPD in principle, on the grounds that at least 50% of the content is trust and estate related.  
 
What is the content of MTR?

The material is drawn from HMRC press releases, Tax Bulletins, VAT business briefs, case reports and articles in the professional press. Each item carries a reference as to source which can be followed up if necessary. 

The logic of the ordering of the 12 sections is as follows: first, Capital Taxation (viz 1. Capital Gains Tax, 2. Inheritance Tax and 3. Stamp Taxes). Second, Personal Tax (4. Personal Income Tax). Third, Business Related Matters (viz, 5. Business Tax, 6. Employment, 7. National Insurance and 8. VAT & Customs Duties). And fourth, Miscellaneous (viz 9. Compliance, 10. Administration, 11. European and International and 12. Residue). An annual binder is provided within the subscription cost.

Despite an inevitable element of selectivity, MTR aims to be catholic in its coverage – and this is reflected in the presentations where appropriate: there may well be NI, VAT or employment tax points of which the person advising mainly on estate planning (for example) should at least be aware. That said, the London sessions at least tend to focus, by majority request, on estate planning issues: it is possible that in future one of the sessions might be geared more to company/commercial matters. 

How is MTR circulated?

The Notes are emailed to each delegate in the week before the presentations (and thus can easily be circulated around the office), with a follow-up four or five pages of practical Points Arising during the various sessions (whether in London, Ipswich or Norwich).

When and where is MTR held?

The London meetings take place at the National Liberal Club, One Whitehall Place, London SW1, on either the first or second Tuesday of the month, generally in the David Lloyd George Room. There is a choice of four sessions: 9.00 - 10.30 (3 places available), 11.00 – 12.30 (6 places available), 1.00 – 2.30 (8 places available) and 4.00 – 5.30 (3 places available).

The Ipswich meetings take place generally on the first or second Wednesday of the month at the offices of Pretty’s solicitors 45 Elm Street, Ipswich 5.00 – 6.30pm (5 places available). 

The Norwich meetings take place at the Norfolk Club, Upper King Street, Norwich on the first or second Thursday of the month from 5.30 – 7.00pm (3 places available). 

Dates are fixed up to a year in advance and any one delegate from a firm can take up the firm’s place each month. Attendance is limited to no more than 30 delegates in London and 25 delegates in Ipswich and Norwich (to make for ease of round table discussion).  The cost in London is £60 plus VAT, and in Ipswich and Norwich £50 plus VAT (billed every six months in advance).

How do I find out more?

For further details, visit http://www.matthewhutton.co.uk/ on Conferences & Seminars and then Monthly Tax Review – or email Matthew on mhutton@paston.co.uk.

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