IHT - Pensions |
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| Introduction |
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| This guide is designed to help our customers to obtain a grant of representation, complete an account of the deceased's estate, and pay any inheritance tax (IHT) which may be due. |
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| It also gives advice about lifetime gifts and the taxation of discretionary trusts. |
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| The proposals in the Finance Bill 2006 affect the meaning in this article regarding: |
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- Gifts into certain kinds of trusts;
- The tax treatment of trusts, known as interest in possession trusts, in which the beneficiaries have a right to benefits;
- The ending of an interest in possession during a beneficiary's lifetime;
- The treatment of funds in alternatively secured pensions on death.
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| This article will be updated as necessary when the Finance Bill is enacted. |
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| All forms referred to in this article are available on HM Revenue and Customs website. |
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| What type of pension may have to be included in the estate for IHT? |
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Usually, the payment of a pension or other benefit will stop when the person dies. But in some cases, the pension may be guaranteed for a fixed period and the person dies before the end of that period. If the payments continue to be paid to the estate then the value of the right to receive the remaining payments should be included for IHT.
What type of pension is not included in the estate for IHT? |
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| Payments made to the deceased's widow, widower or surviving civil partner do not have to be included. |
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| How do I value continuing pension payments? |
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| You can use the guaranteed annuity calculator to estimate the value of continuing payments (see www.hmrc.gov.uk) |
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| Does a lump sum death benefit have to be included in the estate? |
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| Some pension schemes or personal pension policies pay out a lump sum benefit when the person dies. This is often referred to as the death benefit. If the lump sum is: |
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- Payable to the deceased's personal representatives either by right or because there is no-one else who qualifies for the payment; or
- The deceased could, right up until their death, have signed a 'nomination' (either for the first time or after having revoked an existing 'nomination'), which bound the trustees of the pension scheme to make the payment to the person named by the deceased.
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| You must include the lump sum as an asset of the deceased's estate. |
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| A binding nomination is different from a 'letter of wishes'. A letter of wishes records what the deceased would like to happen with the death benefit and does not bind the trustees of the pension scheme to follow the deceased's wishes. |
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| It is important to find out whether or not the deceased could bind the trustees with a nomination. Many pension schemes and policies provide a form that is called a nomination, but which usually goes on to say that the trustees are not bound to follow the deceased's wishes. If the deceased signed such a form, they have a signed a letter of wishes and not a binding nomination. |
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| If the deceased changed their entitlement to benefits during their lifetime, would this give rise to an IHT liability? |
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Most pension schemes and personal pension policies allow the member to dispose of the death benefits and to make changes to the benefits that they are entitled to under the scheme or policy.
Usually, the member can: |
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- Nominate or appoint the death benefits to someone else;
- Assign the death benefits into a trust; or
- Make changes to the pension benefits they intend to take and when they intend to take them.
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| If the deceased made a nomination, appointment or assignment or made any changes to the pension benefits in the 2 years before they died a liability to inheritance tax may have arisen and you should report this on the form D6 which accompanies the IHT 200 (both available from HM Revenue and Customs website) |
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| Examples of where a change in benefit might be made are: |
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- Where the deceased reaches pension age and decides not to take the payment of their pension at that time or chooses to take income drawdown; or
- Where the deceased having got to pension age and chosen to take income drawdown decides at a later date and whilst in ill health to reduce the level of income taken; or
- Where the deceased having got to pension age and chosen to take phased retirement decides at a later date, and whilst in ill health to reduce the number of segments taken.
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| How do I value the benefits given away? |
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| This is a specialist area and the calculations required can be complex. For that reason we do not expect you to calculate the value yourself, but we will need full details so that we can make the calculation for you. |
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| Where the deceased has given away any benefits, or has made some changes to the benefits they were entitled to, it is possible that they may have made a transfer of value. You should give the details we ask for above on form D6 and we will look at what you have said after the grant has been issued. If we think there has been a transfer of value, we will discuss the value with you. |
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| If you wish to include your own value for the benefits given away, you should include a figure on form D3. Use form D17 to show how you have arrived at your value. You may have to enlist the help of an actuary to calculate the value. |
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| The value of the benefits given away or the impact of the changes made will depend to a large extent on the deceased's health at the date of the nomination, appointment or change. So that we can establish the value, you will need to provide some evidence of the deceased's state of health and life expectancy at that time. A letter from the deceased's doctor is the best sort of evidence. If obtaining a letter from the deceased's doctor will delay your application for a grant; you do not have to have it before you send form IHT200 to us. However, we will need to see the letter as soon as you receive it after the grant has been issued. |
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| Contributions to a pension scheme by the scheme member or their employer may constitute a transfer of value if made when/if the member is in ill health. If any contributions were made in the two years preceding the death you will need to provide us with details of the dates, amounts contributed and who made them. |
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| Where can I get more help? |
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| Deciding whether inheritance tax is payable on pension benefits can be difficult. If you need to discuss a particular situation with us please telephone contact us. |
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