HM Revenue & Customs’s policy of treating some pension-to-pension transfers as eligible for inheritance tax has been labeled “a bit perverse” by James Hay’s head of technical support.
Neil MacGillivray said that while pensions do not normally attract IHT, there were some cases where they do, with transfers a “killer” case in point.
He said there had been an uptick in transfers post-pension freedoms – particularly from defined benefit to defined contribution – and that from a tax perspective it could be a “minefield”.
Mr MacGillivray said HMRC’s view was if someone surrenders the right under an existing pension scheme with the intention of transferring into another, then for “that glimpse of an eye” it is eligible to be included in their estate.
“During that fraction, that glimpse of an eye, in theory, though extremely unlikely, they could transfer it into a pension scheme from which their estate benefits,” he said.
“So although the benefits may not themselves go into the estate, the rights are seen to be in their estate during the transfer process.
“That right has a value, quite a significant value when the member is in poor health. And that can make quite a big benefit.”
If the member then dies within two years of the transfer having known they were in poor health, Mr MacGillivray said HMRC may apply inheritance tax.
But he said this rule had been recently challenged by the estate of a woman who made a transfer and died a few weeks afterwards.
The court ruled against HMRC and it is currently in the process of appealing. Mr MiGillivray said it would make a “big difference if it’s upheld that it’s not a transfer of value”.
On the question of the two-year rule, Mr MacGillivray said this was also ambiguous.
“It’s very important when you’re dealing with clients, you do have to ask that question about their health.”
He said large and unusual contributions when a client is in ill health was “a big no-no”.
Other pension areas to be cautious of from an IHT perspective were contribution payments and assignment of death benefits, he said.
FTAdviser has written previously about concern relating to perceived ambiguity in the rules around pensions and IHT. A spokesperson said at that time that HMRC did not agree that the rules were unclear.
"The treatment of pensions and the IHT charges that may arise on transfers between pension schemes are explained in the IHT Manual (IHTM17000 onwards) and this information is also available on other websites and elsewhere so HMRC do not believe that there is no certainty on this point," the spokesperson said.
"HMRC are applying the legislation as set out in the guidance. There is no 'loophole' in the provisions; the treatment will depend on the member's circumstances."