A client previously prepared Wills and undertook Estate Planning with another firm.
They have a pension nomination form that requests on death the pension Trustees exercise their discretion to pay the pension sum into 10 separate pilot trusts created on consecutive days (created when Rysaffe planning was more prominent).
However, as I understand the 10-year charge anniversary is usually determined by the date the member first joined the original pension scheme, so the number of trusts is ineffective? Also when the IHT rules in relation to pensions changes in April 2027, would this then be caught by the Same Day Addition Rules in any event?
I am thinking that the pension can just be nominated into one of the pilot trusts. Her estate is also nominated into Pilot Trust (1), but the pension could then be nominated into Pilot Trust (2)? Am I missing something or am I correct in my current thinking?
This is one of the unforeseen statutory triumphs with inevitable unintended consequences visited upon us by the nincompoops who profess to be our Comrade Legislators.
I cannot say whether by serendipity or intention but s.65(5)(b) will apply to scheme death benefit payments into a pilot trust because the payment by a RPT (pension fund) to a trust is taxable as income, deducted at 45% if a DT. This has been a bugbear of using such trusts where tax-efficient prospective onward distributions are somewhat distant. Where the member died under 75 and the payment is made within 2 years the receipt is not taxable as income as long as the payee is not a “non- qualifying person “:PTM073200. This includes a trust other than a bare trust but the law imposes a special 45% income tax charge with a refund arrangement without time limit for eligible later distributions: PTM073010. The IHT exit charge exemption only requires the payment to be taxable not actually taxed to any extent due to non-residence or allowances: reliefs.
FA 2026 has turned a “pension pot” (I quote, so now a class B controlled substance) into part of the member’s s.4 death estate, by deeming the funds to be beneficially owned by him or her. But technically, if the trust deed and rules so ordain, the trust is an RPT with certain income tax and CGT exemptions.
So arguably this fiction entails treating them as additions under s.67 and same day additions under s.62A as “chargeable transfers” in the first case and “transfers of value” in the second just as they would if the deceased by will had left assets which he actually owned in his estate under s.4(1) to several lifetime trusts of which he was settlor. As you say they have the same commencement date and a important question is what happens if a 10 year anniversary occurs before the pension trustees distribute (as they must within 2 years to ensure an authorised payment). S.58(1)(d) gives an exemption which will obviously not apply to the pilot trust.
S. 81 will apply so IHT exit and TYA charges on the pilot trust will be calculated using a settlor’s cumulation including the value those additions (and any made within 7 years before becoming a member!).
The good news is that almost certainly none of this matters for IHT!!!
The distributions from the pilot trust, in principle liable to IHT exit charges, are not however chargeable if they are taxable on the recipient as income: s.65(5)(b). There is an issue with a TYA charge: the receipt from the pension trust is income so the net of income tax amount is relevant property if either the trustees formally accumulate it or it is made taxable by the 5 year rule in s.66(1A) even though it would not have been if distributed in full the day before the end of the 5 year period. This is not calibrated properly or at all with the arrangement in PTM073010 where the absence of a time limit affords in effect permanent income status. But who cares because the Supreme Court will know the answer! One hopes the Finanzpolitzei will generously and graciously concede that there is no 5 year limit on its income status as it is capital deemed to be income because subjected to a special lump sum death benefit income tax charge.
Hi Jack, thank you for your comments, very helpful. What a minefield!
Client is now over 75, and I wonder if it is worth asking the Trustees of the Pension Fund to direct the benefits into Pilot Trust (No. 2), rather than (No. 1) (which is where the Residuary Estate is being directed into), to assist from an administrative side of matters and keeping the amounts separate given the complex legislation applying to the funds? Thank you again.
My instinct was always that, far from simplifying the admin, combining disparate trust funds is more likely to complicate tax compliance and planning. I tried to dissuade spouses from making joint settlements though at least IHTA makes some (wholly inadequate) provision for joint settlors.
The problem is that a pension trust is an RPT so that s.81 applies to deem a transfer into one pilot trust not to have been distributed to it at all, a sufficient nuisance without it also applying to a trust that contains another fund on an RPT with a different commencement date or is an IPDI or special trust.
If the current nomination uses Rysaffe planning, then it was set up before changes to pension flexibility (2015). It is worth exploring / checking what the motivations are for nominating the pension into trust - to check that this remains the most appropriate nomination under current legislation.
Typically, the tax treatment of using a beneficiaries / nominees drawdown pension are more efficient, though the member cannot retain control beyond the grave - so this must be a strong factor to outweigh the tax consequences.