If a seriously ill person transfers a pension plan and dies soon after, it may be classed as a chargeable lifetime transfer for inheritance tax (IHT) purposes. This situation could arise if the person dies within two years of making the transfer; if they knew they had a serious illness at the time; and if it is not possible to prove they did not have donative intent.
The defence in section 10 of the Inheritance Tax Act (IHTA) 1984 is used in cases where it is possible to prove there is no donative intent. This would apply if the person was clearly acting in their own interests and immediately cashed the pension plan following the transfer or had a regular encashment plan in place.
HMRC collects information on ‘vulnerable’ pension transfers via the IHT 409 form, the pensions supplement to the Estate Return on Death IHT 400 form. For ‘Excepted Estates’, which are worth less than £1 million and pass mainly on to a spouse/civil partner or charity, legal personal representatives (LPRs) can complete the shorter IHT 205 form. However, if an ‘offending’ pension transfer is involved, LPRs will have to complete the IHT 400.
When people transfer pensions at an age when they can draw benefits, the process for calculating IHT charges is often complex. It includes calculating the value of the pension scheme rights the person can give away and deducting the value of retained rights they are entitled to immediately before death. This would usually be the right to the pension commencement lump sum and the current value of any guaranteed annuity, which involves making assumptions about future investment growth.
Paula Steele, managing partner at John Lamb Financial Planning, says: “Things may be about to get simpler. When someone who is 55 or over transfers to a pension plan that offers flexible access, HMRC will now be open to a valuation of retained rights on flexi-access principles. This should considerably reduce the likely transfer of value in many cases, so even if clients are caught, transfers of value are more likely to fall within the available nil rate band.”