The outcome of a recent court case regarding a pension transfer for a terminally ill client should serve as a reminder to advisers to consider inheritance tax pension pitfalls, warns James Hay.
HMRC rules state that if a terminally ill client passes away within two years making payments of contributions, transferring death benefits, or transferring pension scheme rights to a different pension scheme then pension benefits will be subject to inheritance tax (IHT).
The rule that subjects pension contribution made by a terminally ill client to IHT aims to prevent individuals from making additional contributions to their pension in the belief that they will be able to pass wealth to their beneficiaries without them paying IHT.
When an ill individual transfers the rights to death benefits in regard to their pension fund to a bypass trust it is considered to be a transfer of value for IHT purposes.
A transfer of pension scheme rights is also considered to be a transfer of value under IHT and the member surrenders their rights under the existing scheme in return for rights in the new one.
However, this rule was challenged in the case of Revenue and Customs Comrs v Parry and others (personal representatives of Staveley, dec’d)(2017) UKUT 0004 (TCC) when a divorced woman transferred pension plans while terminally ill with cancer in order to ensure that her children benefited from the pension and her ex-husband did not.
After she passed away her pension savings were charged with IHT, but was overturned when her executors proved that there was no intention to confer gratuitous benefit.
Neil MacGillivray, head of technical support at James Hay, said that advisers should heed this case and the rules surrounding it when dealing with terminally ill clients.
“When advising anyone who is in ill health, advisers have to be aware of the IHT risks in relation to payment of contributions, transfer of death benefits and transfer of pension scheme rights to a different pension scheme,” Mr MacGillivray warned.