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

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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.

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4

My understanding of the query was that the trustees had in mind paying premiums on a policy that would not be owned by the trustees as an asset of the SSAS.

“ 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?”

Jack Harper

1 Like
5

Hi Jack,

Yes, sorry - it was me not being clear.

The suggestion is that the SSAS trustees are the legal owners of the policy, with the members as the lives assured. So, the life policy premiums would be paid out of the SSAS bank account and the policy would be an asset of the SSAS. Upon death, the sum assured is paid to the SSAS trustees and deposited in the SSAS bank account, to be used by the SSAS trustees to settle any IHT on just the residual value of the members’ share of the SSAS assets, directly to HMRC.

One view I have had is that it is the PRs of the estate that are obliged to pay the IHT, including that attributable to the members’ share of the pension fund, and not the SSAS trustees, and it may therefore be an unauthorised payment if the trustees were to settle a share of the IHT lability.

My reading of the proposed new rules is that the pension scheme administrator/trustees can pay the IHT to HMRC if instructed to do so yh the PRs, but what are the ramifications of that?

Your insight would be appreciated

6

Provided the trustees can take out the insurance, I would have thought this was possible but with the caveat that the policy would be a pension funds asset and the proceeds of the policy would themselves be subject to IHT on the second death (assuming the first death is exempt). You would therefore need to carry out a grossing up exercise when calculating the value of the policy.

That might require a £2.6m policy on £4m of assets to leave a net £4m after 40% IHT.

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7

Hi Andrew

Thank you, that’s helpful.

However, immediately prior to the second death (assuming a joint life second death policy) the value of the policy is £nil. It only has a value when a valid claim is made, which can only be made immediately after death. So, why would it need grossing up and why would it be in the taxable estate?

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… immediately prior to the second death (assuming a joint life second death policy) the value of the policy is £nil. It only has a value when a valid claim is made, which can only be made immediately after death.

Can you explain this please?

If you say “this is worth £1.6m if you make a claim”, I’ll ask you about how easy it is to make a claim (just submit a form with a stamp, costing roughly £1), the likelihood of the death (100% as its being valued immediately before death, the likelihood of the claim being successful (100% as its a valid policy) and how long it will take (a month because the admin is good) then I (a random person in the open market) might give you something close to the £1.6m (just reduced a bit for the £1 stamp, the envelope and the time value of money for waiting a month).

9

Now I understand the thinking I do not dissent at all from the helpful contributions of Tigger (who has identified the right Manual Guidance) and Andrew who has identified the big snag: that the policy value/proceeds as a trust asset will also be subject to IHT.

The best plan will often be instead to fund the premiums of a policy written in trust so that the proceeds will not be taxed in the death estate of the lives assured. The trust’s status and exposure for IHT needs finessing but should be income tax- and CGT- free while it holds a qualifying policy. A non-qualifying policy with a lump sum funded by NRB CLT or PET may be better, despite income tax, if time to build up a return is anticipated to be short; s.18 or 21 IHT-exempt additional premiums do not count as additions to an RPT under s.67(1).

If the necessary liquidity can be organised within the SSAS and the pensioners are above the minimum age it might be possible to extract funds by way of authorised payments, depending on the recipient’s marginal rate of income tax. Such a stream of taxed income is ideal for paying premiums IHT-exempt under s.21. The pension funds will almost certainly bear some income tax eventually in someone’s hands, though it may be at a lower marginal rate and of course the payment of the tax would be advanced. Those who die under the age of 75 do not have to worry about income tax: PTM073200.

Another source of funds might be the 25% tax-free lump sum: although any sum extracted will not then attract future investment growth income tax-free, that growth would be at future risk of IHT at 40% (and income tax) and may produce a decent alternative return, net of all taxes, via a trust policy the primary purpose of which anyway is strategic—to produce liquidity when needed.

The Politburo has apparently not given thought to whether pension trustees are authorised to use trust funds to pay the pensioner’s death IHT on those funds—which are not a liability of the trustees. But, from basic principles, the member can nominate in lifetime any third party to receive—after his or her death—lump sum(s), provided they are within scope of the trustees’ discretion, subject only to the scheme being the right kind of animal and to income tax where appropriate (and some must beware of the Lump Sum Death Benefit Allowance).(DIS lump sums are still not within IHT but not always income tax-free). I cannot see why an eligible beneficiary cannot ask the trustees to pay a sum to third party, HMRC, if it is taxed nonetheless exactly as if paid to the individual personally.

But IHT on the policy proceeds if trustee-owned seems sub-optimum and especially so if income tax is also chargeable.

Former clients of mine who have income sources from a family company are often able to adjust the annual quantum and timing so therefore also their annual tax bills. Their pension pots will soon no longer be IHT shelters. Taking pension drawdown income personally instead may now appeal if they can use liquid funds like ISAs for regular living expenses.

Then siphoning off such income, up to their annual basic rate limit, using s.21, into value no longer prospectively taxable on their death may even produce better net of tax returns for the family than in a pension fund that will be net of future tax at a combined 67% (or 52% to a basic rate taxpayer or even only 40% if the future payee uses their personal allowance and has no other income).

Some of them will have built up substantial historic ISA investments (within scope of IHT) and by investing in future to take regular tax-free income from them annually, rather than rolling it over, can bring it within s.21. They can cash in some of their IHT-liable ISAs to live on. The family company shares will now be taxable at 50% over the new allowance but often softened by minority discounts. And CGT is still not charged on death—yet!

The new pension pot IHT charges dictate a fresh look at financial and estate planning to factor them into the new big picture. Governments of all stripes get rapidly addicted to sources of tax so a future U-turn cannot be guaranteed but the probability that it may happen must also be taken into account, ideally putting retention of flexibility at a premium.

Jack Harper

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10

I thought the plan might have been to fund a liquid sum to offset the tax, so by a savings policy.

A term policy with a nil value is fine while the life assured is living but if and when it matures the proceeds will become part of the fund if trustee-owned. The new IHT charge is not levied on the trustees but rather the value of the fund is taxed on the death of the member and that will include policy proceeds payable to the trustees on the member’s death. (S.171 is what makes the proceeds of a term policy comprised in the deceased’s free estate liable to IHT on that death but that is not specifically directed to be read across and it fits better with the timing of the s.4 deemed transfer on death).

The key new provision is s.150A to be inserted by the Finance Bill when enacted. The wording is perhaps not as clearly apt in relation to money purchase schemes but it absolutely is for defined benefit schemes. It is hard to believe they are intended (or that any judge would decide them) to be treated differently the one from the other.

What is chargeable in a money purchase scheme is the total amount “held in a pension pot”, defined in subsection (6) as “available for the purpose of providing benefits to or in respect of one specific member of the scheme”, logically the deceased. That must include any life policy proceeds payable to the trustees by virtue of that member’s death (other than excluded benefits one of which is DIS).

So Andrew’s point is that the policy proceeds available to meet the IHT liability will be part of the total chargeable amount liable to IHT.

That amount is then deductible in calculating income tax (if relevant) on an authorised payment to an eligible beneficiary of the pension trust. That deduction is designed to prevent income tax being chargeable on the money used to pay IHT.

New s.210 sets out who has the liability to pay the IHT and includes a scheme administrator and trustees or others holding scheme property. New s.226B applies where the administrator pays the tax at the “taxpayer’s” request (defined as the person liable for it). The payment is not apparently itself liable to income tax as estate income (though it is not specifically made an authorised payment). It will of course reduce what can be paid out. Any prohibition in the scheme rules that would prohibit such a payment is overridden as void.

Jack Harper

1 Like
11

You mention:

The Politburo has apparently not given thought to whether pension trustees are authorised to use trust funds to pay the pensioner’s death IHT on those funds—which are not a liability of the trustees. But, from basic principles, the member can nominate in lifetime any third party to receive—after his or her death—lump sum(s), provided they are within scope of the trustees’ discretion, subject only to the scheme being the right kind of animal and to income tax where appropriate (and some must beware of the Lump Sum Death Benefit Allowance).(DIS lump sums are still not within IHT but not always income tax-free). I cannot see why an eligible beneficiary cannot ask the trustees to pay a sum to third party, HMRC, if it is taxed nonetheless exactly as if paid to the individual personally.

I have no idea whether Cuba’s communist party has given any thought about pension trustees, but the technical consultation suggests that the government expects that the “scheme administrator” will pay the IHT:

2.15 … PSAs will be required to use this information to calculate the amount of Inheritance Tax due on the unused pension funds and death benefits, and to report and pay this to HMRC

It does not explicit says why this is so. For many pension schemes that may be because of s200(1)(b). But it may also be because of the assumption that the PR will tell the PSA to pay it - see new s210, s226A and s226B . So that suggests the PSA (who may or not be the trustees) is legally obliged to pay the IHT.

I have mixed experience around tax is dealt with in pension trust deeds and rules. All (where there has been some semblence of professional advice) will facilitate withholding from payments to the member. Many will go further than that, but I suspect some will not have clear words saying how IHT paid in respect of a member is allocated to that member’s pot.

In relation to the last bit:

I cannot see why an eligible beneficiary cannot ask the trustees to pay a sum to third party, HMRC, if it is taxed nonetheless exactly as if paid to the individual personally.

I am sure you are right that they can ask, but I’m not convinced that the trustees would be allowed to do that under most scheme rules. But the whole point of the exemption from income tax for the IHT paid directly (by the PSA) or indirectly (by the beneficiary) is that there is no income tax on the money used to pay the IHT.

12

I see Jack has just made an earlier post after I started typing the above. So much of it is duplicated now.

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Most whole of policies now have a nil value.

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Thank you Jack, that is really helpful

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I had in mind that the trustee could perhaps appoint funds to a beneficiary outright but then accept a direction from him to pay his creditor. A non-pension trustee could do that, indeed it is accepted law that in principle it can be for the “benefit” of a beneficiary under s.32 TA 1925 to pay off his debts directly to his creditor.

My greater concern was that paying the tax has not apparently been made an authorised payment. The Comrade Legislators seem to think they have covered that because the scheme administrator will be authorised by the eventual Finance Act to pay IHT if requested and by its overriding any prohibition on the scheme rules, obviating any necessary change to them (though that may happen out of abundance of caution).

Jack Harper

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Afterthought. Once a trustee has made an irrevocable lawful appointment to a proper beneficiary the latter acquires a chose in action. This can be assigned in writing to his creditor and notice given to the trustee who would then pay the beneficiary at personal risk of failing to get a good discharge.

It is open to relevant parties to make a chose in action intrinsically non-assignable and this is often done with rights arising from commercial contracts.

I do not make a practice of reading pension trust deeds and rules and I have found that some providers refuse copies to non-customers. So I cannot say whether this is done.

Non-assignability can be ordained by statute or public policy e.g. the assignment of a pension or prospective pension benefits by a living individual, which is why we have by statute pension sharing on divorce.

There was a draft SI published in 2018 preventing the assignment of receivables (relating to business contracts) but it was never enacted given the fierce opposition it attracted. hJttps://www.legislation.gov.uk/ukdsi/2018/9780111171080. Not surprisingly as financing receivables is an active industry. Large enterprises and SPVs were exempted en bloc and there was an entire list of excluded types of contract. In fact the exceptions text was longer than the prevention text.

Jack Harper

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I was thinking that new s.150A would bring the policy into the estate and current s.171 IHTA would value the policy at the value of the proceeds rather than the (negligible) value immediately prior to death.

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I don’t think that is the approach of the new rules. Which is that one is required to identify the funds out of which benefits (other than those few excluded) can be provided—self-evidently only at a later date and not to the deceased.

I cannot believe that any of our leaned, impartial and independent judges would be prepared to hold that a scintilla temporis, separating the moment of death from the consequent accrual of funds payable to the trustees by reason of its occurrence, was sufficient to defeat the objective of the words chosen to embody the intentions of Parliament (even if as a matter of fact there is no actual evidence thereof). It would surely be seen as Pension Angels dancing on the head of a Pin—or rather a Pot.

I presume this approach is to dispel any doubt about the application of s.171 because neither the pension scheme trustees nor the deceased is deemed to make a transfer of the funds immediately before the death as per s.4 IHTA. The statutorily identified funds are deemed rather to be beneficially owned by the deceased as part of his death estate.

Interestingly, to all of us nerds and Google addicts, the text of the current Finance Bill is much better drafted than that which was published on 21 July 2025.

Jack Harper