Payment of IHT on pensions with life assurance

Trusts Discussion
1

With the looming changes to IHT treatment of pensions in April 2027, I am considering ways in which the liability may be planned for and I am trying to establish whether it is viable for the pension scheme trustees to take out a life assurance policy (with premiums funded from the pension scheme bank account) to provide the liquidity to meet the liability relating to a deceased member’s share of the residual fund.

Here is a live example:

Family owned Limited Company with mum and dad (shareholders) and son as shareholding director. The Company has a SSAS that owns the trading premises, leased to the trading company, and the SSAS has very little liquidity because the rent is being paid out by the trustees to mum and dad as members, having retired from the company.

Mum and Dad’s share of the SSAS assets are £4m. So, there are now two problems post April 2027 in that (a) there is a £1.6m IHT liability and (b) there is insufficient liquidity to pay the tax.

The free estate does not have enough liquidity, the SSAS trustees do not want to mortgage the trading premises, they do not wish to sell and the Company cannot pay in £1.6m by way of contributions.

A joint life second death policy could be taken out by mum and Dad (in trust) or the Company could take out a policy and earmark the proceeds to make a company pension contribution when both mum and dad have died, but that presents problems - for example the business might not exist when they have both died or may have been sold.

My question is, can the SSAS trustees take out a policy with the mum and dad (as member trustees) as the owners and the lives assured?

Are there any consequences of the trustees paying premiums out of the SSAS bank account?

In the event of a claim, the SSAS trustees would have the £1.6m in cash to then pay onto HMRC when the IHT400 is submitted. Does that create a problem?

Any insight will be appreciated.

Thank you

Robin

2

I find it hard to see how the trustees could properly use pension trust funds to acquire an asset which is not then owned by the trustees. Surely it would be an unauthorised investment and the premiums unauthorised payments: PTM121000 and 131000. The sanctions for such payments are truly unpleasant.

The scheme administrator has a duty to report and will be conscious of reputational damage as a “fit and proper person”:PTM153000. This is not an occasion for a dodgy or reckless incumbent of the role to take a chance.

The problem itself is yet another consequence of the new IHT rules. “Unforeseen” would be charitable or polite, something of which I can never be fairly accused. Stupid is more accurate.

Belatedly HMG-HMRC have cottoned on to the issues that, “as any fule no”, inevitably had to arise out of the accountability and liability for the new IHT death charge, complicating the hapless and involuntary participation in the ensuing chaos of scheme trustees, the deceased’s PRs, and fund beneficiaries. As money was involved they have got their legislative-administrative acts together at Report Stage of the Finance Bill. No danger they would move the due and payable date of the tax.

Robin highlights a typical difficulty that will flow from the particular but not at all unusual set of circumstances, exacerbated in some cases by the new BPR vandalism—class hatred and economic self-harm.

HMG is plainly unsympathetic to pension provision, except for MPs and public sector “working people”. If asked they would retort that as IHT and income tax cannot exceed a combined 67% (with historic income tax relief on contributions),and as investment returns will have been
tax-free, the IHT on the pension fund assets can be raised by selling the investments. Any resultant loss from an ill-timed fire sale, to avoid interest at (only) 7.75% pa while stocks last, and serious market obstacles to any such sale, will be viewed as not their concern. Capitalists only have themselves to blame for their predicament when they could be long-term resident in Dubai, Italy or Portugal or a country with no death tax like India or Australia.

Funding the tax payment has long been the Cinderella of estate planning but the changes to the former exemption of pension pots and to APR/BPR, despite instalment option for the latter, were introduced with insufficient warning to allow adjustment of long-standing financial planning linked to the status quo.

It seems to me that the trustees cannot properly raise a loan on security of the business premises to pay IHT as it is not their liability but the taxpayer’s, even if at the PRs’ request they can deduct it from beneficiary payments.

The solutions must at least involve the family company at some future date purchasing the asset for which it could borrow, utilising the former rental payments. The crunch will come only when a pensioner dies and there is at least a spouse exemption.

Life assurance through a savings policy basis will be more important than ever, held on trust outside the estates of the relevant pensioners, but will inevitably entail an additional tax cost if premiums have to be funded by extractions from the company. That may in turn lend itself to IHT-exempt premiums (normal expenditure out of income) or use of annual exemption and NRB. A DT will suffer RPT charges and an alternative can be joint absolute default interests among several younger family beneficiaries, revocable or subject to defeasance by a power of appointment vested in a trusted fiduciary, with additional life cover of their respective lives via cheaper term cover.

Of course many will look forward to 1989 and the possible demise of the tax policies of the Workers’ Paradise.

Jack Harper

1 Like
3

I don’t know enough about SSASs (sorry Jack) but I did not think that there was any piece of tax legislation that prevented the trustees taking out a life insurance policy on the life of a member (although the SSAS’s trust deed and rules might). Such a policy would need to be an asset of the scheme, which I think you state.

In fact, I thought that life insurance was a relatively common feature to provide death-in-service benefits and this is consisent with most SSASs being “other money purchase arrangements”. In that context, HMRC’s manuals specifically refer to life insurance policies - PTM023500. What I am not clear on is how a joint life second death policy would fit in because it would not be used to provide benefits on the first death. So you may need to tweak your plan to have two separate policies (or in my ignorance be completely wrong).

Contributions to the scheme to fund this would be deductible for CT purposes but presumably it would also use up some the member’s annual allowance (or more than that if they were already retired).

Then I guess the question is what are the assets of the SSAS on death? Using the £4m of property and the £1.6m value of the policy immediately before death, these come to £5.6m and so the IHT would be a bit higher than the £1.6m - so a bit of grossing up would be needed to £2.7m.