Pensions: What's new this week - 24 August 2020

Pensions, death and taxes: HMRC v Parry

The Supreme Court has ruled on a long-running dispute over pension scheme death benefits and inheritance tax (IHT) charges, although the implications of the ruling are limited to a large extent by subsequent changes to tax legislation: HMRC v Parry. 

In this case, benefits under a company scheme had been invested in a section 32 buyout policy following the member’s divorce; the pension was over-funded, and the member wanted to ensure that in the event of her death no surplus funds would be returned to her ex-husband’s company. Shortly before her death in 2006, she transferred her benefits into a personal pension plan (PPP). Under both the section 32 policy and the PPP, a lump sum death benefit would be payable if the member died without taking lifetime benefits (under the policy, the death benefit would be paid to the member’s estate). The member’s sons were nominated to receive the PPP death benefit (subject to the discretion of the plan administrator).

The case concerned whether the transfer of funds to the PPP, and/or the member’s omission to draw benefits from that plan before her death, triggered IHT charges as ‘lifetime transfers of value’. The First-tier Tribunal, Upper Tribunal and Court of Appeal have all reached different answers to these questions; the Supreme Court has now given the same decision as the First-tier Tribunal, that IHT was due on the omission to take benefits, but not on the transfer.

In relation to the failure to take lifetime benefits, the Supreme Court’s reasoning was that this falls within the scope of a ‘disposition’ under the Inheritance Tax Act – that is, an act or deliberate omission by which the deceased person’s estate is diminished and the value of another person’s estate is increased, with the intention of conferring a gratuitous benefit on that person. The failure to draw benefits was a transfer of value, since it was specifically intended to trigger the payment (or an increased payment) of death benefits to the sons’ estates. The fact that the PPP administrator had discretion as to the recipient of the death benefits did not break the chain of causation between the omission and the increase in value of the sons’ estates, so an IHT charge was triggered in this case. 

The tax rules were amended in Finance Act 2011: for deaths on or after 6 April 2011, the omission to exercise rights under a registered pension scheme, a qualifying non-UK pension scheme or a section 615(3) scheme is not a transfer of value for IHT purposes. Under a further amendment in the Finance Act 2016, the same applies to funds that are designated for drawdown but not taken as income. As a result, this case does not change the tax position where, for example, a member in serious ill health chooses not to take their pension benefits prior to death.

Turning to the transfer, the Court held that on its own, this was not ‘intended to confer a gratuitous benefit’ to the deceased member’s sons (because they were already the beneficiaries of her estate; the fact that they were nominated to receive benefits under the PPP did not confer a different or greater benefit in the circumstances). This remained the case even though the transfer was linked to her choice not to draw a lifetime pension – the objective of benefiting her sons could have been achieved without the transfer. However, the position might be different where a member (for example in circumstances of serious ill health) takes action that intentionally confers a new or different benefit, such as transferring benefits from DB to DC and designating them for drawdown. HMRC’s current IHT guidance says that ‘in general, where transfers are made more than 2 years before a death you can assume that the member was in normal health, unless there is evidence to the contrary. In that case there is no transfer of value’. 

A summary of the decision is available here. 

Redundancy and pensions – new blog posts 

As part of our series on employment and pensions aspects of redundancy exercises, we have published two blog posts looking at ways in which redundancies can trigger potentially unexpected pension costs, and at practical issues to consider when a redundancy exercise is on the horizon. 

Further posts in this series can be found on our Employment Talk blog.

TPR: GAD modelling for long-term funding objective

Trustees and advisers who are assessing the implications of TPR’s DB funding consultation may be interested in new information about the modelling carried out by the Government Actuary's Department (GAD). This provides commentary about GAD’s modelling of a scheme once it has reached its long-term funding objective (LTO) – further information about the implications for schemes prior to reaching the LTO will be published alongside TPR’s second funding consultation.