Inheritance tax fears for pensions

A landmark court case could bring certain pensions under the inheritance tax umbrella.

920_MW_P23_Pensions
HMRC's legal victory could threaten your savings

A landmark legal ruling last week means savers suffering ill health who move their pension funds from one provider to another could unwittingly be exposing their heirs to an unexpected inheritance tax (IHT) bill.

In normal circumstances, pension savings can be passed on to heirs with no IHT to pay. But, technically, HM Revenue & Customs (HMRC) has the right to impose the levy in cases where someone dies within two years of having transferred such savings. The rule is generally only applied in cases where HMRC suspects a transfer has been made specifically to reduce tax.

HMRC casts its net wider

Now, however, the tax authority has won a legal case that could give it the right to apply the rules more widely. The Court of Appeal, overturning previous decisions from lower courts, said HMRC was entitled to apply IHT on a pension transferred by a woman to a new provider six weeks before her death. Her sons had claimed that the transfer was made to prevent her former husband receiving a share of her pension benefits (he, as her employer, could have claimed any surplus) but according to HMRC the woman, who had been diagnosed with terminal cancer, was reorganising her finances to protect her sons from IHT in advance of her death. HMRC thus treated the move as a "chargeable lifetime transfer" followed by an "omission to act", as she did not draw benefits from the pension.

A spokesman for HMRC defended its aggressive stance by arguing that savers suffering serious ill health should not be able to make "transfers of value" to protect their heirs from paying IHT. However, the tax authority has never previously pursued such cases with so much zeal. It is also unfortunate that the ruling does not provide certainty about how future cases will be assessed for example, about how serious a saver's ill-health would have to be for HMRC to take similar action.

In theory, however, the heirs of any savers transferring pension savings from one scheme to another less than two years before their death could now face an unexpected IHT bill if the saver was not in good health at the time of the transfer. That could mean handing over 40% of the savings to the taxman.

The upshot is that many savers will now need to take professional advice on their tax position before transferring pension benefits, in addition to financial advice on whether the transfer makes sense. They will also have all this hassle when coping with the ill-health of a loved one.

Recommended

Pass on your pension without paying inheritance tax
Personal finance

Pass on your pension without paying inheritance tax

The 2015 pension reforms make it easier for you to ensure your heirs avoid inheritance tax when you die
29 Jan 2020
How to deal with self-assessment tax returns after a very trying year
Tax

How to deal with self-assessment tax returns after a very trying year

The Covid-19 pandemic will complicate the self-assessment tax return process for 2019-20. What if you can’t pay? Ruth Jackson-Kirby has some advice.
20 Jan 2021
Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
A beginner’s guide to inflation – everything you need to know
Inflation

A beginner’s guide to inflation – everything you need to know

One of the most frequently mentioned topics in the news these days is inflation. But what exactly is inflation and how does it affect the economy and …
18 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
The best investment trusts to buy for 2021
Investment trusts

The best investment trusts to buy for 2021

Sectors ranging from emerging markets to student accommodation look poised to do well this year, says David Stevenson, as he picks the best investment…
19 Jan 2021