IHTM17052 - Pensions: IHT charges: general power over death benefits

Where a person has a general power that allows them to dispose of property as they see fit, that property is treated as part of the person’s estate in accordance with IHTA84/S5(2).

In the case of:

IHTA84/S5(2) applies even where the property is settled property – IHTA84/S151(4).

Where a pension scheme member can nominate who will receive any lump sum death benefit, and the pension scheme provider must comply with that nomination, the member has a general power within the meaning of IHTA84/S5(2).

A member also has a general power within the meaning of IHTA84/S5(2) where they can create a situation where the pension scheme provider has no choice but to follow the member’s instruction. This is the case even if the member has not actually left the scheme provider with no other choice.

Example

A pension scheme may provide on a member’s death that if the member has made a valid nomination then the scheme provider has discretion to pay the death benefits to the person nominated, or to anyone else with an interest in the member’s estate. However, if the member makes no valid nomination in their lifetime then the death benefits must be paid to the member’s estate.

In this case, the member could choose not to make a valid nomination and therefore the scheme provider would have no choice other than to pay the death benefits to the member’s estate. The death benefits would therefore be treated as part of the member’s estate in accordance with IHTA84/S5(2).

The position would be the same if the member had made a revocable nomination in their lifetime, since they had the power to revoke the nomination, meaning that the scheme provider would have had to pay the death benefit to the member’s estate.

Most UK pension schemes allow members to nominate specified beneficiaries but these are generally not binding nominations. They are simply letters of wishes that record what the member would like to happen with the death benefits. Where pension scheme providers have discretion over the payment of death benefits, and the member could not have created a situation where scheme providers had no discretion, the payment is not treated as part of the estate whether or not any letter of wishes is followed. This is the case even where discretion is exercised in favour of the estate or the personal representatives.

Death benefits are not only payable as a lump sum. Some schemes may have a number of payment options available following the death of a member. For example, the options might be a lump sum death benefit or a nominee’s flexi-access drawdown fund.

If the member has control over who will receive the pension death benefits then they will form part of the member’s estate in accordance with IHTA84/S5(2). Usually, however, even where the member can make a binding nomination of who should receive any flexi-access drawdown fund, for example, the scheme provider would have a choice over whether to provide a flexi-access drawdown fund or whether to pay a lump sum death benefit.

If the scheme provider can choose which type of death benefit to pay and the member cannot make a binding nomination of all the different possible death benefits, the death benefits will not treated as part of the member’s estate on death. However, if the member can create a situation where the scheme provider has no choice and has to pay any death benefits in accordance with the member’s directions, the death benefits will be within the member’s estate on death. You should seek the advice of Technical before taking forward such an argument.

A binding nomination is most often seen in the case of non-UK schemes and some statutory schemes.

There are also other less common situations where a person could have a general power to dispose of death benefits under a pension scheme. For example, where death benefits are assigned to a discretionary trust and the deceased had the power to appoint themselves or their estate as a potential beneficiary. However, in most cases where death benefits are assigned into trust, the pension scheme member, their personal representatives and their estate are specifically excluded from being beneficiaries.

The issue of a general power over property arose in the case of Kempe and another (personal representative of Lyon, deceased) v Inland Revenue Commissioners [2004] STC (SCD) 467. This case involved a term life policy where the policyholder could designate the beneficiaries who would receive the sum assured when he died. After the policyholder’s death the sum assured was paid to his sisters as the designated beneficiaries. It was held that the deceased did have a general power to dispose of the property, so it fell into his estate.