I would be interested to hear members’ view on the following slightly unusual scenario, which I cannot quite decide is straightforward or not.
D died in 2015. The executors administered her estate and IHT was paid at the time. The executors have now heard from D’s private pension provider to the effect they owed D’s estate a 6 figure sum in pension arrears plus a 5 figure sum for interest on the arrears at 1% over base. The letter to the executors explained that the arrears arose as a result of underpayments of pension made to D from 1995 to the date of death, and that the pension provider has only just become aware of this after a “recent review”. The pension provider’s letter also states: “As this error has occurred more than 6 years ago, the payment will be made on a discretionary basis”.
The executors duly completed and returned the provider’s claim form, and the pension provider transferred the money into their account. The executors (who are also beneficiaries) are now wondering if their unexpected good fortune will be tempered in part by the need to pay IHT on the arrears.
I took the view, initially, that IHT is payable, as the arrears amounted (in part at least) to a debt owed to the estate at the date of death (DOD). Then I started to consider the discretionary nature of the payment given that the arrears go back (from DOD) some 20 years. The case of Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank Plc & Ors  appears to establish (amongst other things, no doubt) that: (1) pension underpayments, at least of the kind considered in that case (which I suspect, although do not yet know, may be very similar to mine) are not subject to statutory limitation periods; (2) that whether arrears of this kind are due to be repaid to the scheme member depends on the scheme rules. In that case the scheme rules stated that pension underpayments were not payable to the member after 6 years, but that the pension trustees had a discretion to pay them anyway. My clients’ letter from the pension provider is strongly suggestive of the possibility that their pension rules operate in a similar way. I will be writing to them to find out.
Assuming that, or something like it, is the case, I would take the view that IHT is payable on the arrears going back 6 years from DOD, but that the balance, being money in which D had no beneficial interest at DOD and which was a discretionary or gratuitous payment to the estate, incurs no IHT.
Any comments from forum members, particularly on the pension aspects, would be much appreciated. I suspect it may not be the only case of its kind.