Is it time to remove pensions from IHT completely?
If pension death benefits were removed from IHT, this would reduce the administration time and costs for a large number of cases and simplify the rules and distress for clients and their beneficiaries. Charlene Young asks if it is time for a rethink.
Earlier this year, the Chancellor asked the Office for Tax Simplification (OTS) to review various aspects of Inheritance Tax (IHT) to try and identify simplification opportunities.
According to HMRC, less than 10% of people assessed for IHT will actually pay anything – making it a hugely inefficient tax for both HMRC and the taxpayer.
The OTS published their first report in November which acknowledged the interaction between IHT and pensions as a particular area of complexity.
The current interaction can be summarised as:
- Employer contributions
- Promised pensions
- Pensions/funds that could be drawn but are not being drawn
- Regular pension contributions
- Transfers in normal health
- Death benefits not awarded under the discretion of scheme administrators or trustees
- Transfers where the member has a severely reduced life expectancy
- Increased contributions in ill health
- Assignment of benefits in ill health
Over time, changes to legislation have moved regimes from pension promises to pension rights. In defined contribution schemes in particular, where each member has their own pot, discretion over the recipient of the benefits only really serves to keep the death benefits out of IHT.
The cost of gathering sufficient information in order to make a reasonable decision when exercising discretion can add £100 to a simple case and significantly more to complex cases with a number of potential beneficiaries. There can also be significant delays in the decision whilst sufficient information is gathered. This all adds to the woes of the bereaved as providers decide who the benefits are payable to. Contentious cases are increasingly being referred to the Pensions Ombudsman which adds further to the time and cost burden of what an acceptable ‘discretion’ actually is.
If we consider cases where a pension transfer was received in the two years before death, the provider may have to withhold a proportion of the distribution until they receive confirmation that IHT has been paid. This is because s200 of IHTA1984 allows HMRC to pursue the trustees or administrators responsible for the distribution if there is unpaid IHT.
Time for a rethink?
If pension death benefits were removed from IHT, this would reduce the administration time and costs for a large number of cases and simplify the rules and distress for clients and their beneficiaries.
It would also mean that cases and claims such as that of Mrs Staveley (HMRC v Parry and Ors) would no longer need to be heard.
If HMRC is worried about lost revenue, our experience tells us the number of people making increased contributions and transfers whilst in ill health is very low compared to the general level of contribution and transfer activity. Yet the time and cost burden of administering this, in particular the legal costs for both sides when claims on transfers are pursued, must be relatively high. Even the judges in the Staveley case could not agree on the intention of IHTA1984 with regard to gratuitous benefit.
Pension freedoms and the changes to the taxation of pension death benefits in 2015 showed bold reform to legislation is achievable. Isn’t it about time bold reform was extended to remove pensions from IHT completely?