I think the answer to this question is going to be quite simple, but I would appreciate forum members’ throughts and experience on this!
A has died, leaving behind their minor child, aged 14 years. A left their estate to the minor child at the age of 25.
At the same time, A’s employer’s pension scheme has agreed that it will pay out around £400,000 into a trust for the minor child.
My question is whether it is possible for the pension company to set up an 18-25 trust? My understanding from HMRC is that it is not possible because it is not being established under a Will or by the CICS ( IHTM42816 - Special trusts: Age 18-to-25 trusts - HMRC internal manual - GOV.UK ) and the fact of how A’s will is drafted is irrelevant.
What does everyone else think?
Yes, it’s definitely correct that such a trust created by the pension fund trustees would not be an 18-to-25 Trust.
I’m curious whether the pension trustees have a discretion to pay to the deceased member’s estate and if so whether they’d be willing to exercise that instead. I wonder if forum members think that could be an 18-to-25 Trust?
Whilst I think it could come within the 18-25 trust if paid into the estate, would it not then be subject to IHT as an asset of the estate?
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I cannot agree that a payment out of a registered pension fund has any chance of falling within s71D IHTA. The wording of sub para (2)(a) is unambiguous. The payment whether made to the PRs or the estate beneficiaries or into a trust for them is a distribution from a lifetime trust under s65 but exempt. Not by Will or intestacy.
The pension trust is exempt IHT under s58(1)(d) from RPT charges but it remains a lifetime trust of which the deceased was the settlor.
HMRC consider that the settlor of any trust receiving such a payment is the deceased scheme member through a lifetime transfer when he became a scheme member. (Should this be date of first contribution? But what if the scheme is non-contributary; does the deceased make a TOV by just becoming a scheme member?).
If the deceased was under 75 when he died the payment would be free of income tax but if 75 or over it will be taxed at the recipient’s marginal rate of income tax, which can be deferred by payment into an RPT whose future distributions will be free of IHT under s65(5)(b). That exemption does not apply to a 10 year anniversary charge so the NRB will depend on the cumulation of the settlor (i.e. the scheme member, the deceased) when he set the trust up which is when he became a member (see IHTM17084-5) or when he set up a pilot trust into which the payment is ultimately made.
If the settlor/scheme member dies under 75 RPT charges will apply as to any other trust and distributions will not be liable to income tax.
An important practical issue is that the payment out should be within the 2 year period in IHTM17083 or “Technical” may get you (at least between sunset and sunrise)
Any trust of a payment from a pensions trust will be liable to tax in the usual way on income and gains from the invested fund.
Hi Andrew Jones!
Thanks for your reply - glad to hear I am on the right track.
I can imagine that the proposed path is possible but are we not then exposing the funds to an immediate IHT charge at 40%?
Definitely not, unless the payment of the lump sum is not discretionary.
In most cases, lump sum death benefits are paid at the discretion of the pension scheme trustees or providers even where there is a nomination that expresses a wish as to the beneficiary. They are not then part of the estate or chargeable to Inheritance Tax. However there are some cases where the payment is not discretionary and Inheritance Tax is due on all or part of the lump sums. I wholly agree with the following.
"Lump sum death benefits fall within the estate where:
- the payment is made to the estate as of right
- there is a binding nomination made by the deceased that the payment is to be made to specified beneficiaries (IHTM17052)
- for deaths before 6 April 2012, in certain circumstances, the payment includes protected rights.
Spouse or civil partner exemption is available where appropriate when the payment is part of the estate."
Thanks for your reply. The payment coming form the pension company is a death in service benefit - does that still fall within the exemption under s58 (1) (d) ? If not, am I correct to understand that it would be treated as would any other RPT?
The deceased was under 75 when they died, as such am I correct to understand that based on there are no special income tax considerations?
Thank you very much for your expertise!
The DIS benefit is tax-free. An individual who. after leaving service, can take his pension pot, if and to the extent that his scheme allows, tax-free if he is under 75. In either case if the scheme trustees put the money into a trust it will be a lifetime RPT of which he is the settlor, commencing when he joined the scheme. It will have a full NRB unless he had at that time an existing cumulation which is still within 7 years.
Thanks Jack - is the settlement exempt from IHT charges (entry, periodic, exit) as other RPT would be? Noted regarding the NRB and the settlor.
The individual did not leave the service - they died whilst in service (hence the death in service benefit).
Once the funds go into the trust all RPT charges apply as the pension exemption has ended. There may well be a full NRB as the settlor may well have had no cumulation when he joined. s67 IHTA is not engaged as the fund does not arise from a CLT by the settlor.