Inheritance Tax 

How to navigate inheritance tax and pensions with clients

  • Learn in which instances pensions are subject to inheritance tax and why.
  • Consider what happens when clients want to transfer their DB pensions to a DC arrangement.
  • Understand how to help clients in these situations.
CPD
Approx.30min
How to navigate inheritance tax and pensions with clients

The inheritance tax (IHT) statistics published on July 27 2018 stated that “IHT receipts totalled £5.2bn in 2017 to 2018; this is an increase of 8 per cent (£388m) compared to 2016 to 2017”.

More and more people are paying IHT and the nil rate band has remained at £325,000 since 2009. Although the introduction of the residence nil rate band has improved the situation for many, planning is more important than it has ever been. 

While pensions are not normally subject to IHT there are circumstances where they are and, while you may be aware of these issues, it is highly likely that your professional connections - estate planning solicitors, for instance - may not be.  

How can you help them through the complexities of IHT and pensions?

When is IHT payable on pensions?

Pension freedoms made pensions more attractive than they were before, as pensions can now be cascaded through the generations. If the pension is in a discretionary defined contribution scheme then it is not normally subject to IHT. It makes sound financial sense to use any estate subject to IHT before using pensions.

This should allow pensions to grow and the amount of IHT payable by beneficiaries to reduce.

But there are circumstances when IHT does apply to pensions. Let us take a look at the three most common scenarios.

Contributions

Contributions are not usually lifetime transfers but they may be subject to IHT if:

•    The member knows they are ill and unlikely to survive to take their retirement benefits and those retirement benefits will be outside of the estate.

In this situation contributions within the past two years will be considered to be a transfer of value. If these contributions are unusual in size and not part of a regular arrangement then this will need to be noted on the IHT409 form.

This could be where the client has been regularly paying £100 a month and then in the past two years has increased the contribution to £1,000 a month.

They are knowingly trying to move IHT-able estate to an IHT-friendly environment. However, if contributions remained at £100 per month then this would be classed as a regular arrangement. 

•    The contributions are to someone else’s pension. The client is then transferring money from their estate to the estate of someone else for that person’s benefit and so this is a lifetime gift. IHT will not apply if there is a valid exemption, such as the spouse’s exemption or the annual exemption of £3,000.  

The normal expenditure from income exemption is also a very useful exemption to use as it is unlimited. All that is required to prove it is free from IHT is evidence that it formed a pattern of giving, was made out of income and there is not a reduced standard of living for the donor because of the gift.  

CPD
Approx.30min
  1. The nil rate band has remained at £325,000 since when?

  2. If a member knows they are ill and unlikely to survive to take their retirement benefits, then contributions from what period will be considered to be a transfer of value?

  3. Is the following statement true or false? "If a client has a retirement annuity contract then it will be paid to the estate unless there is a trust wrapped around it."

  4. Since pension freedoms and the increase in transfer values, many clients are transferring their DB pensions to DC arrangements. But quite often these people are doing so in what circumstances?

  5. In the example of Mark, what is the before figure agreed with HMRC?

  6. There are three key issues to be identified when a client visits their solicitor in ill health and wants a will or power of attorney drafted. Which is not one of these?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Learn in which instances pensions are subject to inheritance tax and why.
  • Consider what happens when clients want to transfer their DB pensions to a DC arrangement.
  • Understand how to help clients in these situations.

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