IHT Planning for Individuals in Ill Health – What NOT to do!
“In this world nothing can be said to be certain, except for death and taxes. …Unless you die under age 75 with a personal pension plan.”
Okay, so we may be slightly paraphrasing Benjamin Franklin here. However, the changes to pension death benefit legislation over recent years have certainly brought about a shift in purpose for personal pension plans for some higher net worth individuals; who are forfeiting pension income with a view to passing more wealth to their families tax-efficiently on death.
It is common knowledge that unused funds within personal pensions usually escape Inheritance Tax (IHT) on death. It is slightly less common knowledge, however, that personal pensions can also generally be passed to any beneficiary (or set of beneficiaries) free of other taxes on death before age 75.
So what is stopping individuals in ill health from using personal pensions as last minute planning mechanisms for reducing their IHT bill on death or to promote tax-efficient succession planning? Well, it depends on HMRC’s definition of ‘ill health’.
As a rule of thumb, where a member is deemed “likely to survive to take their pension benefits”, there is no ‘transfer of value’ for IHT purposes. However, where a member is deemed by HMRC to be in ‘ill health’ at the time pension contributions are made, and the member dies within two years of making such a contribution, IHT relief will be lost.
This rule is in place to ascertain that pension contributions do not confer any gratuitous benefit to a third party (which could be considered an intentional attempt to reduce your IHT bill). And this treatment doesn’t just apply to pension contributions either…
Members in ill health should also be wary when transferring pension death benefits into certain types of trust (e.g. a bypass trust), or even transferring pension scheme rights to a different pension scheme.
The latter is considered particularly cruel given that an individual may be transferring benefits in order to more flexibly access their funds during the remainder of their lifetime. For this reason, HMRC have been challenged on this point and in the recent case of Stavely V HMRC, it was ruled that personal pensions transferred whilst in ‘ill health’ for reasons other than IHT planning, should remain exempt from IHT.
Of course, each case is different and financial and legal advice should always be sought.
So it looks as if death and taxes remain certain after all… Unless you plan to live forever!
Please note that the information provided in this article is in no way intended as advice and is provided for information purposes only. You should seek formal advice before taking any action in respect of your pension fund.