Inheritance Tax  

When are pension death benefits subject to IHT?

  • Explain how lump sum benefits work
  • Explain impact of changes to death benefits
  • Identify conditions which might cause IHT issues
CPD
Approx.30min
When are pension death benefits subject to IHT?
 Credit: Andrea Piacquadio via Pexels

It was interesting, though perhaps unsurprising, to read in a recent FTAdviser article that the percentage of advisers (31 per cent) expecting clients to be affected by the announcement in the 2021 Budget of a freeze in inheritance tax thresholds until 2026 is almost double the percentage (17 per cent) expecting clients to be affected by the equivalent lifetime allowance freeze.

Pensions are often said to be generally free of inheritance tax. However, it’s important to remember that the word ‘generally’ is doing an awful lot of heavy lifting in that statement. 

The potential for inheritance tax to be a factor within pensions has been tested in a few legal cases over recent years.

The highest profile was the case of HMRC vs Parry and others. That involved the death benefits of a Mrs Staveley. 

The case was heard through various courts with the key issue being whether or not a transfer made by Mrs Staveley from her Section 32 policy to a personal pension whilst she was terminally ill made the death benefits subject to IHT

The Supreme Court ultimately found that the transfer did not make the death benefits subject to IHT, which was reported at the time as significantly reducing the chance of pension benefits being subject to IHT. 

To some extent that reporting was accurate, but the case does not mean that all pension transfers made whilst in serious ill health are automatically exempt from IHT, or that various other actions carried out within a pension are problem free.

With that in mind, I thought it was worth running through the pensions-related requirements when dealing with an individual’s estate by working our way through the IHT409. 

This is the form which must be completed when dealing with a deceased’s estate where they held pensions other than the State Pension at the point of their death.  As we go through the form, we’ll touch on some the key issues as we move along.

Do I need to complete the form at all?

If the deceased held any pensions other than the State Pension, the simple answer to this question is Yes. This applies even if the combined value of the deceased’s estate and their pensions is less than the IHT threshold, meaning that IHT is very unlikely to be an issue.

As we move into a world where the vast majority of individual’s will have been members of automatic enrolment pensions at some point in their life, the chances of dealing with an estate in which IHT409 does not need to be completed will reduce dramatically.

Thankfully, in the majority of cases, completion of the form will involve little more than ticking a couple of boxes.

When might more information be required?

Provided the date of death under consideration was after 6 April 2011 then there are two sets of circumstances when further information will need to be provided: