Taxman takes a tougher line

NICK PALMER of law firm Barker Gotelee explains how HM Revenue and Customs is adopting a tougher line on Inheritance Tax on undrawn pensions

IN A recent case, Inheritance Tax (IHT) was assessed on the value of a woman’s potential retirement benefits even though she had not claimed any of these before she died.

Fryer v HM Revenue & Customs involved a Mrs Arnold who was diagnosed as terminally ill approximately one year before she died.

Several years earlier she had placed the death benefits payable under her pension in trust for her daughters. Mrs Arnold did not take any retirement benefits during her lifetime as she did not need the extra cash or income. Indeed, Mrs Arnold could have taken benefits at any time since she turned 50. She died aged 60.

HMRC successfully argued that Mrs Arnold’s decision not to take retirement benefits increased the amount of death benefits payable to her daughters. Accordingly, her estate should include the value of the maximum benefits she could have taken under her pension on the day before she died, being the maximum cash lump sum available and an income guaranteed for 10 years.

Whilst this is not entirely new law, this does represent a significant – and very worrying – change in HMRC’s assessment of such cases.

HMRC’s guidance suggests they will only pursue cases where the deceased decided not to take benefits at the normal retirement date specified in their plan and at that time was terminally or seriously ill.

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However, the ruling did not depend on this and Mrs Arnold’s estate was assessed on the value of benefits which she could have taken on the day before she died. Surely most people are seriously ill just before they die?

Furthermore, HMRC assessed Mrs Arnold’s estate as if she had taken the maximum value benefits available, but this does not take into account real-life considerations. Not everyone takes the maximum pension available as soon as they reach their specified retirement date and many retirees choose a higher pension income with fewer guaranteed payments.

So what are the implications? While HMRC is becoming even more aggressive in their assessment of IHT, the exact legal position remains uncertain.

However, once you are able to draw your pension, even if you do not plan to take benefits, consider the IHT implications.

Previously, pension trustees may have been prepared to distribute pension death benefits shortly after someone had died. This is unlikely to continue.

Due to the uncertainty, it will become more important for executors to take legal and financial advice, on the validity of any charge to IHT and on the hypothetical valuation of these undrawn pensions. You should review your IHT position and what options are available to you to mitigate this, particularly as it seems that the IHT threshold will not be raised to �1m after all.