I have a situation with a discretionary trust that was set up by a widow in 2013 with a nominal £10. Her husband died in 2012 and post death his pension benefits were directed into this trust. The beneficiaries are the widow and two sons and they have taken the income directly, one-third each. They have also registered the trust as non-taxable. At what point did this become a relevant property trust and is the husband the settlor? Does that depend on what type of pension was involved? Does the fact that they have effectively mandated the income mean this could be treated as an Interest in possession?
Oh dear, here we go again:
1 Age of deceased at date of death?
2 defined benefit or contribution scheme?
3 deceased’s IHT cumulation when he first joined the scheme?
4 Amounts paid to DT by pension trustees and whether income tax deducted?
5 What is the income from that sum paid in that has been “mandated” and how did the beneficiaries get to have equitable interests in
a DT of the type that justified mandation, viz. an entitlement to the income as it arises?
6 If the trust was registered on TRS as non-taxable has it not been re-registered as taxable because the payment in was not itself taxable as income (see 4 above) and because whatever income it has since generated has all been taxed directly on the beneficiaries?
7 On what basis did the pension trustees satisfy themselves that a lump sum could be paid as an authorised payment to a trust set up by someone other than the deceased pensioner? What nominations were permitted by the scheme rules and actually made?
The DT must be a RPT for IHT the because the only QIIP that can be created in a trust after 21 March 2006 are an IPDI, a TSI or a disabled trust under s89. An IPDI can only be created by Will or on intestacy. Not by a nomination even if binding and so even now in the s4 death estate by s5(2) IHTA.
When some unused pots become liable to IHT after 5 April 2027 the draft legislation creates the fiction that the deceased beneficially owned the pot, even though he did not and it is actually held in a DT, and this fiction allows the spouse (and charity) exemption but does not allow the deceased by Will to create IPDIs for children or other non-spouses or civil partners, so therefore not a BMT or a 18-25 trust. A transfer from a trust can be made to a s89 trust (which must be an RPT though it confers a deemed QIIP). A nomination, even if binding rather than the more usual non-binding, is not a Will nor is it a lifetime transfer or a transfer by the trustees.
As the new fiction only applies to the death estate so this does not change. If the rules allow a binding nomination this appears to be a “settlement power” so outside s5(2) and if exercisable and exercised by Will can create IPDIs etc; s47A IHTA. Existing schemes may change their rules to permit the pensioner to exercise such a power, preferably by Will only to be sure it is outside s5(2).
The new law specifically states that a QIIP cannot subsist in a pension fund. The fund itself, though an RPT is exempt from TYA and exit charges under s58(1)(d) IHTA but s81 can apply. This will not change but it is not clear how a fund the deceased is deemed to have beneficially owned on death can also then be transferred by the trustees of it with, presumably, exemption from an exit charge where s.81 does not apply, as on an outright transfer. Alice has gone through the looking glass again but yet again we do not know how far until a judge opines or HMRC
issue a non-statutory proclamation of doubtful general legal enforceability.
Jack Harper
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Jack,
May i ask your opinion on whether a binding nomination, made via a separate nomination form as opposed to via the will, could result in an IPDI if the binding nomination directs the death benefits to the pension scheme member’s estate and the will includes an IPDI in respect of any lump sum pension death benefits paid to the estate. Or would the nomination have to be exercised via the will itself?
Any document which is intended to have testamentary effect (to become operative only on death) must be executed as a Will must be. A nomination will normally have that intent but will not be so executed.
Even if it were, like any other asset comprised in a person’s estate, he must be competent to dispose of it. That will not be so if the asset is held by a third party, the pension fund trustees, subject to their discretion and even where they have no such discretion the asset will almost certainly be intrinsically non-assignable in lifetime, at least until a benefit becomes payable when that can normally then be assigned without restriction.
The draft IHT legislation on unused funds, which can only be defined contribution, treats the fund as fictionally contained in the deceased’s taxable estate but there is no proposal to also treat it as contained in the real world estate, as beneficially owned property, so that it could be left by Will or be subject to the intestacy rules or made the subject of a lifetime gift. So double whammy: they can tax it but you don’t own it.
Providers may allow members to own their funds if that does not prejudice the criteria for tax registration. I do not consider myself an expert on pension fund law, so not on registration requirements, but there must be a sporting chance that this Government is either so thick or just so rapaciously and ideologically vindictive as to take tax from property that the taxpayer does not actually own and so cannot utilise or alienate save by taking benefits, authorised or not, in lifetime or nominating their post-death direction in a way that income tax is paid on them.
This much seems a legitimate Goverment objective in so far as as tax relief will have been given on contributions paid, though there is no capped limit to the tax value of that historic relief adjusted to current prices. Nevertheless it seems piratical that an individual who has purchased a financial product which is potentially liable to heavy taxation, at up to 67%, should be precluded from giving it away (net of income tax) to save IHT by surviving 7 years as he could with any other asset he owned. This can be done by the cumbersome route of drawdown coupled with the normal expenditure exemption but what a palaver and not all at once.
I cannot claim to have identified all the unintended consequences of this tax change but I can pretty well guarantee the Government hasn’t because it never does.
Jack Harper