Pensions and IHT: a reminder of existing guidelines
The recently concluded case of Fryer v HMRC initially created some worry in the world of pensions, as it brought into question the inheritance tax treatment of a pension fund when a decision has been made to defer taking benefits.
In practice, the ruling last week simply confirmed existing guidelines on deferring pension benefits to preserve the value of death benefits in the case of a terminal illness.
Pension funds are only typically liable to inheritance tax (IHT) when an individual deliberately denies themselves income in order to preserve the fund for their heirs. Guidance issued by the Inland Revenue in 1992 confirmed that they would look closely at cases where a terminal illness was involved.
In practice, IHT is usually not applied to a deferred pension fund if the individual survives for at least two years after making the decision to defer their pension income.
The ruling in the Fryer v HMRC case confirms existing practice.
The case focused on actions of 59-year-old Patricia Arnold who was diagnosed with terminal cancer. She made the decision not to take her occupational pension scheme benefits when she reached her 60th birthday, as she was entitled to do.
Ms Arnold died the following year and her personal representatives attempted to pass her pension death benefits to her beneficiaries as a capital sum outside of her estate. Under normal circumstances, had she not died within two years of making the decision, this would have been free of IHT.
HMRC believed that she had made a transfer of value of part of her estate for the purposes of s.3(3) Inheritance Tax Act 1984. This meant they applied an IHT charge on the sum, as her actions in deferring the pension benefit had diminished the value of her estate.
Whilst we must now wait for definitive guidelines from HMRC, this ruling does not appear to change very much. They have already commented that it was their established practice to seek IHT in these circumstances, depending on the facts of each case.