Adviser > News > May 2010 > Pensions and inheritance tax – an update
Pensions and inheritance tax – an update
"Advisers need to be careful when suggesting that clients defer taking their pension benefits." Fiona Tait, Scottish Life Business Development Manager.
Fiona Tait
The judgement given in the court case of Fryer & Others v HMRC highlights HMRC's belief that failing to take a pension when it is due could constitute a transfer of value and, as such, could attract inheritance tax.
The facts
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Mrs Arnold set up a section 32 buy out plan with a normal retirement date of 60, with the (standard) option to take benefits from age 50 to 75.
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She was diagnosed with ovarian cancer in 2002 when aged 59.
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Prior to her 60th birthday the provider sent out a benefits options pack, which included the option to take an annuity.
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Mrs Arnold died in July 2003, having reached age 60, without having exercised her right to take benefits or having notified the provider of her intention not to take benefits.
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Insofar as this decision was deliberate it was because she simply did not require the benefits.
- HMRC argued that her failure to take benefits decreased the value of assets in her estate and should be treated as a transfer of value.
The judgement
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The judge upheld HMRC's argument and further stated that an omission to act "is to be treated as deliberate unless it can be shown not to have been deliberate" and "the burden of showing this (proving the negative) falls on [the defendant] - it is not for HMRC to prove that the omission was deliberate".
- Furthermore since the decision to defer was continuing at the date of her death the transfer was deemed to have taken place at that date - after her NRA and after the initial cancer diagnosis.
Implications
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At first sight this case is worrying for all pension planholders who fail to take benefits at the first opportunity, however it is significant that the decision came from a tribunal which means it may not be used to set a precedent for future cases.
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There is also the possibility that the decision will be challenged which may result in its being changed or overturned.
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At a more practical level the case could also be seen as simply confirming previous HMRC guidance that failure to take benefits could constitute a transfer of value, particularly if the decision appears to have been taken in the knowledge of ill health.
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What is significant here is that Mrs Arnold did not actively decide not to take her benefits but was held to have made a deliberate omission. In addition this (lack of) decision was made at a time when she knew she was in ill health.
Action
This case highlights the need for advisers to be very careful when suggesting, for very good reasons, that clients defer taking their pension benefits. I would suggest the following points of action:
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Indentify any clients currently in deferment and review their files. Ensure the client's intentions are clear and documented.
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Where a client makes a decision to defer benefits, document it and document the reasons why they did it (I would suggest leaving out "to avoid Inheritance Tax").
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If the client is in good health at the time they make a decision to defer their pension document that too.
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For future clients where the actual retirement date is not known it makes sense to set up a pension plan to age 75 and review it as the client approaches retirement. The client can always take benefits early (after age 55).
Reference
Full details of the Fryer & Ors v Revenue & Customs judgement are available at www.bailii.org/uk/cases/UKFTT/TC/2010/TC00398.html.
For professional advisers only
