Inheritance tax to cover pensions, claims ruling

 

Lifelong savers who delay drawing benefits from their pension funds may be subject to inheritance tax upon their death following a controversial victory for HM Revenue & Customs (HMRC).

The case involved a woman diagnosed with a terminal illness who failed to take retirement benefits (tax-free cash and an annuity) before her death, altering the concept of financial planning for workers across the UK, experts have warned.

Fryer and Others v HMRC overturns almost 20 years of established practice and increases the reach of inheritance tax (IHT), whilst creating a new risk that executors of estates could be fined for failing to pay the correct IHT.

Currently, individuals are taxed on a transfer of value, made within the previous seven tax years, at the amount by which the deceased’s estate is reduced.

In the case of Mrs Arnold, who died in 2003, the HMRC argued that a transfer of value was made on the date of her death, because she previously deferred her retirement benefits, reducing the value of her estate.

But Mrs Arnold’s legal team claimed that not requesting pension benefits was not deliberate and that the monetary benefits should be passed on to her children without IHT deductions.

“It looks like HMRC argued that the client made an active choice not to take benefits and that this gives an IHT liability because, first, it reduced the value of her estate and therefore IHT liability; second, it could not be proven that there was no deliberate decision to avoid taking benefits,” commented Billy Mackay of self invested personal pension (SIPP) specialists AJ Bell.

Those presiding over the newly formed First-Tier Tax Tribunal found in favour of the HMRC, ruling that Mrs Arnold’s failure to claim pension benefits, whilst not intentional, allowed the HRMC to lawful deduct inheritance tax from funds left to her children.

“Now we have a situation where the Revenue is ignoring the wider circumstances. Regardless of actual income needs, it considers that where the individual could take their pension but decides not to, this is IHT avoidance,” Martin Reynard of London-based accountants Blick Rothenberd, told the Telegraph.

While the case has caused contrasting opinions across the financial sector, those in a similar position to Mrs Arnold have been encouraged to seek independent financial advice to help safeguard pensions for younger generations.