IHTM17101 - Pensions: other provisions: Tax Bulletin

The text of the Tax Bulletin issued in February 1992 is as follows.

‘Inheritance Tax: Retirement Benefits Under Private Pension Contracts: Section 3(3) Inheritance Tax Act 1984

Background

Many pension scheme benefits are written under trust on terms which provide that the retirement benefit (that is, the pension) continues to be for the policyholder and the death benefit is assigned, normally to members of the family. The two benefits are mutually exclusive: once the retirement benefit is taken, the death benefit lapses.

A common feature of these schemes is that from a specified age - from fifty upwards depending on the type of scheme - the policyholder can elect to take the retirement benefit. There are cases where policyholders do not elect to take the benefit at the specified age and have still not done so when they die (so that the death benefit becomes payable). In such cases the Capital Taxes Offices (CTO) take the view that, in certain circumstances, the failure to exercise the right to take the retirement benefit before death can give rise to a lifetime charge to Inheritance Tax under IHTA84/S3 (3).

The Association of British Insurers asked the CTO to clarify the circumstances in which a Section 3(3) claim might arise with these pension arrangements. The CTO set out their view in correspondence with the Association. It is summarised here.

The scope for a Section 3(3) claim

In practice, the overwhelming majority of pension arrangements are not affected. The CTO expect to see very few cases where a claim would even be considered. This is because

  • the vast majority of policyholders exercise their right to take retirement benefits during their lifetime or survive to the age beyond which they cannot defer taking the retirement benefit. All these cases fall outside the scope of a potential claim
  • the chargeable estate of many policyholders will be below the Inheritance Tax threshold. If no tax is actually payable CTO would naturally not pursue a claim
  • any claims that do arise are likely to be limited to retirement annuity contracts or personal pension schemes. Only exceptionally would claims involve occupational pension schemes
  • there is no question of a claim being raised in cases of genuine pension arrangements, that is, where it is clear that the policyholder’s primary intention is to provide for his or her own retirement benefit

CTO would consider raising a claim in such cases as remain only where there was evidence that the policyholder’s intention in failing to take up retirement benefits was to increase the estate of someone else (the beneficiaries of the death benefit) rather than to benefit himself or herself.

To this end, CTO will look closely at certain pension arrangements where the policyholder became aware that he or she was suffering from a terminal illness, or was in such poor health that his or her life was uninsurable, and at or after that time the policyholder

  • took out a new policy and assigned the death benefit on trust, or
  • assigned on trust the death benefit of an existing policy, or
  • paid further contributions to a single premium policy or enhanced contributions to a regular premium policy where the death benefit had been previously assigned on trust, or
  • deferred the date for taking retirement benefits

In these circumstances it would be difficult to argue that the actions of the policyholder were intended to make provision for his or her own retirement given the prospect of an early death. Even then CTO would not pursue the claim where the death benefit was paid to the policyholder’s spouse or civil partner (IHTM11032) and/or dependants (that is, any individuals financially dependent on the policyholder). In addition, a claim would not normally be pursued where the policyholder survived for two years or more after making any of these arrangements but we reserve the right to examine each case individually.

For the avoidance of doubt, we would adopt a similar approach in cases involving

  • personal pension schemes set up under deed poll under the Superannuation Funds Office or Integrated Model rules, or
  • buy-out policies under trust, approved under ICTA88/S591 (2)(g) (commonly known as `Section 32 policies’ after the original legislation).’