IHT on pension underpayments

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 [2018] 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.

Whilst the letter might be “strongly suggestive”, if HMRC wanted to review the position that would be no protection if it did set out the true position.

I suggest that you need to see a copy of the pension rules to establish the position.

However, if the pension provider were to provide written confirmation that the Lloyds decision applies to this payment, that might be sufficient (although is the pension provider likely to provide such advice in an unequivocal manner?)

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

I would agree with your approach subject to checking the payment was genuinely discretionary.

Paul Davies
Clarke Willmott

I’m unfamiliar with the LLoyds case referred to in the post.

Doesn’t IHTA 1984 s240(2) not limit proceedings to recover under paid IHT to 4 years from the later of the date payment was made and the date on which the IHT became due eassuming no carelessness or deliberate action and an account was delivered) ?

Malcolm Finney

IHTM10063 - Investigating the assets on page 6 : Pensions (box 56)

Any money that was due to the deceased from a pension scheme, either as a lump sum or arrears payable up to the date they died will be included in box 56 of the IHT400. Details of the pensions themselves will be given on form IHT409. Guidance on how to investigate the values and information given for pensions can be found at IHTM17001.