Will we see pensions being brought into the inheritance tax regime? This is a question often asked when it comes to what a future government could decide to do in relation to pensions on death.
The answer is that pensions are, of course, already included in the IHT regime. Most schemes do not attract IHT charges, but in certain circumstances they can do and how and when this happens is complex and, in some cases, misunderstood.
Broadly speaking, pensions are brought into the IHT regime under the general principles for IHT, namely:
- what assets an individual has on death;
- what their estate is entitled to;
- what property they have a general power of disposal over;
- what transfers of value they may have made in the period prior.
Pensions do benefit from an explicit exemption. Most scheme death benefits are held on discretionary trusts, which would ordinarily mean they are classed as “relevant property”, but the IHT code exempts them from the periodic and exit charges usually associated with them.
When it comes to pensions, the type of pension an individual has and what they do with it can, and does, have an impact on the IHT treatment.
Being included within the IHT regime means pensions have their own IHT form (IHT 409). Working through the three main areas of this form allows us to better understand the circumstances in which pensions can bring about IHT charges.
1) Payments made under a pension arrangement that continue after a death
There are two main areas here. First, there are payments of the member’s pension that have become due but had not been paid at the date of death. This could be “pension arrears” and, as they are due to the estate, they form part of it for IHT purposes.
The second situation is “guarantee payments”, that is, the pension will be paid for a minimum period. Where the deceased dies prior to the end of the period and has control over who the guaranteed payments are made to, then the open market value of those payments is included in the estate.
HM Revenue & Customs has a calculator for working out this value. This may be moot if being paid to a spouse as the inter-spouse exemption would then apply. If the scheme has discretion over who payments are made to, then there is no value for IHT.
2) Payments of death benefits
It is essential to understand the rules governing the payment of death benefits from a pension scheme. This may require reading the trust deed and/or scheme rules or an explanation from the trustees/administrator.
If the scheme has discretion on the payment of death benefits, they do not form part of the estate for IHT purposes.
Where the estate is entitled to the benefits then these are included in the estate. An example of this can be old retirement annuity plans that have not been placed under trust.
Just recently, I saw one of these plans that was valued at more than £1mn and would make a substantial difference to the value of a person’s estate.
Some public sector additional voluntary contributions are also payable to the estate. Another example is pension plans that used to be in an occupational scheme and have been transferred into an individual's own name.
